There are questions to be asked about the state of Carillion’s myriad pension obligations. And actions to be taken to safeguard members’ retirement savings.
We also need to learn the right lessons about the wider implications of Carillion’s demise for pension saving. There is a risk that inappropriate or cynical action taken now in the name of protecting pensions could derail those good quality, and highly valued, pension schemes that remain in the UK.
Of Carillion’s 14 defined benefit pension schemes, eight have begun the assessment process with the Pension Protection Fund. Those affects around 6,000 of the 27,500 members of these schemes.
We have a good idea of what has put workers’ pensions at risk at Carlllion. That is an inherently unstable system of outsourcing and the failure of the investment institutions that owned its shares to properly scrutinise how the company was run.
The system of pension protection that we have in place appears to be working as it should at Carillion. Those private sector schemes whose sponsors are being liquidated have gone into assessment by the Pension Protection Fund. Many of those yet to retire face the unwelcome prospect of a 10 per cent cut in the pension they expected.
In the short term, some actions should be taken to ensure that the future pensions of Carillion workers are safeguarded:
Carillion’s demise has prompted a flurry of eye-catching boss-bashing by the government and renewed debate about pension provision across corporate Britain.
We even had the rare spectacle of the Prime Minister writing about pensions in the Observer newspaper.
“In the spring, we will set out new tough new rules for executives who try to line their own pockets by putting their workers’ pensions at risk,” Theresa May says.
But it is not at all clear that this would stop future pensions losses.
The sight of seemingly inept executives walking off with big bonuses is distasteful. But to seek a direct link to the reduced pensions some workers will face in future is misleading.
We should be very wary of apparent simple quick fixes that could ultimately lead to poorer pensions for workers.
So-called “mega-fines” on corporate executives mooted by the Work and Pensions Committee are an idea worth exploring. But there is a risk that such action gets tied up in the courts in tedious debates about whether executives could have predicted the implications of their decisions.
Any fines levied in such circumstances should go to the pension scheme involved to benefit scheme members, or the PPF. But let’s not pretend that this will encourage employers to offer DB pensions.
Greater obligations on scheme sponsors to plug pension deficits have been touted too. But they risk undermining the efficient operation of schemes that have liabilities stretching decades into the future. And by threatening investment and jobs today many more employers will simply shut their schemes.
If we are concerned about the losses borne by scheme members when a business fails (and we should be), then let’s look at how to improve compensation, for instance by requiring the PPF to aim for improved levels of pay-outs over time.
These proposals come at a time when there is increasing concern among trade unions that the Pensions Regulator’s new mantra “clearer, quicker, and tougher” has not signalled the expected focus on those schemes being run most ineptly. Rather TPR has chosen to target those schemes that remain open to members and continue to amass liabilities.
Policymakers need to recognise that DB schemes are an efficient vehicle for providing retirement benefits because their collective nature means that investment and longevity risks are pooled, so they can provide pensions efficiently.
Trade union members have repeatedly expressed great appreciation of such schemes. They recognise the importance of adequate pensions to provide an income in retirement. Often they have sacrificed other forms of pay to ensure their continuation. Sometimes members have taken industrial action to defend them.
We agree with the government’s own recent Green Paper on DB pensions that concluded there is not a general ‘affordability’ problem for the majority of employers running a DB scheme.
But more does need to be done to ensure that these schemes remain viable. With 13 per cent of schemes still open, they remain an important way of ensuring people can provide for themselves in their old age.
For a start, schemes should be allowed to adopt more appropriate investment strategies. Too often trustees have felt obliged to invest heavily in government and corporate bonds. This hinders their ability to generate a real return. And it undermines the potential for DB schemes to utilise their collective nature by sharing risks across a wide membership to efficiently provide benefits.
There is a strong case for a differentiated regime for open DB schemes. Maintaining these is a priority because they ensure that both younger and older workers have access to good quality pension entitlements. Such a regime might allow greater flexibility on valuations and greater scope for benefit changes as long as a scheme remains open to new entrants. This should be supported by adding to the Pensions Regulator’s remit an objective of seeking to maintain and promote good quality DB pension schemes.
One of the great challenges trustees face with a disparate conglomerate like Carillion is obtaining accurate information on the health of the scheme sponsor. Increased rights of disclosure to trustees and trade union representatives at times of corporate merger or acquisition would help them to manage this risk. There is a great lack of transparency in the course of transactions that increase the chances of poor outcomes for pension scheme members. This could be improved if trustees were given greater rights to demand information about how a scheme is affected by a transaction and sponsors had greater obligations to make information available to trade union representatives.
Carillion appears to be another example of inept corporate behaviour in a dysfunctional sector. Many current and former Carillion workers are likely to bear some of the cost of its failures. We must not allow the situation to become an attack on decent pension schemes elsewhere.
The Trades Union Congress annual pensions conference brings together a range of experts to examine the most important developments in the world of pensions. This year’s event focuses on fixing the ‘Great Pensions Lottery’ that means the insecurity experienced by many in work will be amplified in their retirement years. Register for the event by following the link below.