In defence of the Carillion Pension Scheme trustees

I admit to a strong sympathy with the trustees of the Carillion Pension Scheme, who have been heavily criticised by Frank Field and others. It is amazing what accuracy the benefit of hindsight can achieve.

Before the change in Practice Note 3, trustees duties were clear, in that they were required to recover as much money as possible from the employer as quickly as possible. This all changed in 2014, the updated practice note being issued in the middle of the banking crisis, against an unspoken charge that pension trustees were being sufficiently aggressive to cause companies to cease investing and stop creating jobs. This was all about stimulating the economy with a collaborative approach between employer and trustees to ensure that business investment was not denied. There was also a view that bond yields, were at an untimely low level, causing deficits to be falsely inflated. On that note we now know, with the benefit of hindsight, that we are in an era of a new normal in respect of interest rates.

The logic in 2014 was sound, with an improving economy and profitability leading to increased future contributions and the reduction of deficits. This was all fine, until trustees started asking for a share in future outperformance, which was too often denied on the grounds of being too complex, confusing or expensive to manage.

One can imagine the newspaper headlines in the event that the Carillion Trustees had, a couple of years ago, been so demanding of the employer that it chose to enter liquidation voluntarily with a loss of thousands of jobs. The press reporting would have been scathing of the trustees and it would be a brave trustee who actively participated in such a move.

Given the lack of security available to the Carillion Trustees, they were, without regulatory support,  effectively forced into a corner of agreeing a recovery plan right at the bottom end of their reasonable expectations.

I refer to a lack of regulatory support because in my experience, where trustees have written advising that the 15 month deadline will be breached, the response is invariably one whereby the trustees are told to go away and agree the matter with the employer. In such circumstances, the Regulator is acting as a timekeeper, not a referee.

I have been involved on the covenant aspects of a valuation exercise, for the trustees, where the employer had been losing money for, many, years and was able to do so because it held an investment. In this case the trustees, on strong legal advice, were able to force the employer into insolvency and recover the asset. This was an unusual case because the asset was otherwise un-encumbered.  In the majority of difficult cases there are no such assets available with anything of value already secured  by the bank.

So why is the Regulator so unwilling to exercise its enforcement powers and issues contribution notices or financial support directions? I suspect the answer is simply one of resource and a fear of ending up in the courts at great expense, with limited potential upside. At present an employer will consider itself unlucky if, for reasons other than a blatant breach, it ends up on the wrong side of an enforcement power. Perhaps if they were used more regularly, employers would cave in earlier once an initial threat has been made.
 
So how can things be improved for trustees facing a Carillion employer?
Firstly, the Regulator should take a stronger stance where there has been a failure to agree a valuation in the 15 month period. A further time limit of perhaps three months before the Regulator gets further involved might crystallise action.

Secondly, the Regulator should be more willing to call meetings of the employer and trustee to listen to the issues. My experience here is of large regulatory teams turning up to meetings, almost always exceeding the attendance by either employer or trustees.  Could they provide a “lighter touch” approach, with fewer staff attending, thus allowing a greater number of valuations to be participated in.

Many schemes breaching the 15 month deadline have foreign ultimate parent companies. Formal “meetings in Brighton” may stimulate such companies to a great level of co-operation.
Thirdly, regulatory enforcement powers should be used more often, including a willingness to take action against smaller schemes. Presumably doing so would be both cheaper and less risky for the Regulator. A few modest wins would go quite a long way.

In the past few months the Regulator has begun issuing fines against the trustees of master trusts on a regular basis. I suspect that the message has hit home in the master trust universe. Whilst regulatory intervention is different, a small and often approach may positively impact the wider population of defined benefit schemes.

There are many similarities between the BHS and Carillion situations. These have hit the press because of their size and notoriety, however there will be many more smaller but similar scenarios, the trustees in which would be better protected by a more proactive regulatory oversight.

No doubt Frank Field will have his views on how that oversight should operate. 
 

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