Regulatory Bodies » Greater pension scrutiny may follow Carillion fiasco

Greater pension scrutiny may follow Carillion fiasco

Payment of hundreds of millions of pounds in dividends while the pension scheme lurched to a £1 billion deficit could result in greater pension scrutiny of corporates, say experts

Former pensions minister Steve Webb says companies paying out large dividends to shareholders while their pension funds run big deficits may be subject to greater regulatory scrutiny, following the collapse of Carillion.

He says the Pension Regulator may seek to enhance its powers after the building group continued to pay out hundreds of millions of pounds in dividends despite its pension fund deficit mushrooming to nearly £1 billion.

He joins other experts in saying that pension fund trustees ought to be given more support in negotiating with sponsoring companies, after revelations that attempts by the trustees of the Carillion’s scheme to clarify the company’s financial health were repeatedly brushed off.

Webb, who was pensions minister in the 2010-15 coalition government, says: “I think we can expect much greater regulatory scrutiny from the Pensions Regulator.

“The Regulator will be much more interested in understanding what is going on when a company is paying a dividend during a corporates’s recovery,” says Webb, who is now head of policy for insurer and pension company Royal London.

“Trustees may want to know why a company is paying a fat dividend, when they may not be paying enough into the pension fund,” says Webb. “There were suggestions that Carillion was on a 15 year recovery programme, but was paying hundreds of millions into the dividend, so the Regulator may well be wanting to take a tougher line in future,” he adds.

Clive Pugh, a pensions regulatory expert having spent 5 years as a senior lawyer at the Regulator and a partner of Burges Salmon LLP says: “The Regulator has always had extensive powers including to make groups of companies or individuals pay millions towards related pensions schemes. Now with a string of cases, culminating in Carillion we are seeing a growing political and regulatory will for these powers to be used on a markedly increased basis.”

Rethinking incentives

Webb says there are also questions around alignment of incentives at Carillion, where he says company executives seemed to be more interested in paying the dividend, than looking after the interests of past and present employees of the firm.

“This may result in changes in the way the remuneration committees looks at this issue, as the government has stated its keenness for making  companies focus on the long term rather than the short term,” says Webb.

“I’m not saying companies shouldn’t pay dividends when they have a pension fund deficit, but in the context of situations such as Bhs, Tata Steel and now Carillion they may need to look again at the rules,” he adds.

Webb says: “Carillion’s senior management didn’t seem to know what was going on across the company. Trustees need to know if the company is going well and if not, they need to be told. At the moment the relationship between pension trustees and the sponsoring company is an uneven playing field”

Building bridges with trustees

Burges Salmon’s Pugh says: “The trustees are one of the vital gatekeepers for a scheme’s interests. Keeping trustees informed can help resolve issues at an early stage and help avoid the cost and distraction of investigations at a later stage. Keeping trustees informed also is important in showing that a company has acted reasonably, a key factor in any dialogue with the regulator”.

Pugh adds:  “We have seen very material settlements having to be paid as a result of regulatory investigations, sometimes in the hundreds of millions. Not only can early involvement by companies and transparent dialogue reduce this risk, they can reduce the costs, distraction and reputational risk that accompany pensions investigations.”

Joe Dabrowski, Head of Governance and Investment at the Pensions and Lifetime Savings Association, says it’s important for finance directors of sponsoring companies to be aware of the pension scheme’s funding position.

He says that due to a variety of issues including increased longevity, low interest rates and challenging macro-economic conditions, a significant proportion of the UK’s defined benefit (DB) pension schemes are currently underfunded. “Understanding the funding requirements of the scheme is a critical concern for finance directors of the sponsor,” he says.

“If a scheme can’t meet its statutory funding objective, the trustees must put an appropriate recovery plan in place to return to full funding.  This will often involve increased payments or payments over a sustained period (the average recovery plan is 8 years) from the schemes sponsoring employer.

Given the implications for the company and the employer’s responsibility to ensure that the scheme is adequately supported, understanding the current and projected position of the scheme is vital,” says Dabrowski.

He says it is critical important that finance directors maintain a good relationship with trustees, who are required to act in the best interests of the scheme members and work with the sponsoring employer to ensure that the scheme is well funded – or steps are being taken to improve its funding position.

“Having a good relationship with trustees ensures that they are able to discuss developing issues with the finance director, or vice versa, and steps can be taken to manage any emerging issues early – for example a weakening of the funding position or the employer covenant,” says Dabrowski.

“When there is a constructive working relationship between schemes and their employers you would expect to see better outcomes, and both parties working to find solutions, often creatively, to issues that arise,” he adds.

“ In situations where communication has broken down between trustees and their sponsoring employer, all parties suffer.  It is harder to come to agreement on specific steps that need to be taken and it takes far longer to rectify issues,” he continues.


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