The Insolvency Service probably didn’t need to be told how to do its job, but there is no harm in the business secretary, Greg Clark, telling it to “fast-track” its investigations into the actions of Carillion’s directors and former directors. And, yes, it’s often sensible to give the Financial Reporting Council a prod. The accountancy watchdog is not known for its electric speed and we would all like to know more about why the auditor KPMG gave Carillion a clean bill of health in March last year.
But Clark may wish to dispatch his next letter to the Pensions Regulator, whose statements on Carillion read as extremely defensive.
Try this: “The level of dividends paid compared to the level of payments to the schemes was better than the average for listed companies and was considered acceptable in the context of the group’s reported profitability and trading strength at the time.”
That phrase “considered acceptable” requires explanation given that the deficit in the main funds was about £580m at last count. Carillion’s accounts show that it made deficit recovery payments of £47.4m in 2015 and £46.6m in 2016. But the dividends to shareholders were higher – £80m then £82.7m.
A deficit occurs when a salary-related pension scheme doesn't have enough assets to pay for all its future possible liabilities - ie, payouts to workers when they retire.
How is it measured?
There are different ways of measuring a deficit, which can result in widely different figures. However, it is a legal requirement to reduce any deficit over time. This requirement has changed a number of times in recent years as the government has tried to get the right balance between protecting members' future pensions and not putting so heavy a funding obligation on employers as to encourage them to close schemes, according to workSMART, a website run by the TUC.
Things that affect a scheme’s funding position include contribution levels, investment returns (both those being achieved now and what experts forecast for the future), interest rates, inflation and life expectancy data.
What can be done to top up pension schemes?
Either the employer makes additional payments to narrow the deficit, or the trustees find other ways of reducing it, such as cutting benefits, upping member contributions or even shutting down the scheme so that workers can't carry on paying into it.
We are always told that the Pensions Regulator lives in the land of the possible, that squeezing companies too hard on dividends can be counter-productive and that striking the right balance is important. Even so, £80m-ish in dividends and £47m-ish for the pension scheme looks the wrong way around. Carillion was an acquisition-hungry company in an industry not unused to corporate collapses.
“We are not prepared to comment further about our involvement unless it becomes appropriate to do so,” concludes the regulator. Take that as your cue, Mr Clark.
CBI is oddly quiet on Carillion collapse
Naturally, business lobby groups have had lots to say about the biggest UK corporate collapse in years – well, most of them anyway.
The Federation of Small Businesses was quick out of the traps to demand that Carillion’s suppliers should be paid and that government contracts should not be a love-in with big business. The Institute of Directors did an effective job of damning the “highly inappropriate” pay awards to Carillion directors.
And the CBI? The self-styled “British business voice around the world” has been oddly quiet. Director-general Carolyn Fairbairn hasn’t drawn any public conclusions and all one can extract by way of official CBI statement is two anodyne sentences, the first of which just says “this is a sad time for Carillion, its staff, customers and suppliers”.
The lack of vigour is surprising from a pro-business organisation because there is a respectable pro-business argument to be made. The CBI could say, for example, that Carillion’s demise shows that too much risk has been transferred to the private sector via private finance initiative (PFI) and outsourcing contracts. It could suggest that a more collaborative approach, with risks and rewards shared equitably, is the way to go.
One might not agree with that argument – but it’s the sort of thing one expects to hear from the CBI. Maybe Fairbairn is lobbying behind the scenes or will unveil her thinking next week in (inevitably) Davos. In the meantime, the hot news out of the CBI is that a “fresh approach” is needed to make skills reforms last. Perhaps it is – but it’s not what everyone is talking about.
Provident Financial in limbo
“Our priorities for 2018 are to rebuild trust with our customers, regulators, shareholders and employees,” says Malcolm Le May, stand-in chairman of money-lender Provident Financial. Call that a full sweep on the rebuilding trust front, then.
Customers walked away in droves when Provident botched its attempt to turn its self-employed doorstep agents into full-time “customer experience managers”. Staff were obviously annoyed by the same calamity. As for the regulators, the Financial Conduct Authority (FCA) is plainly doing a thorough job on Provident, investigating both its Moneybarn car finance arm and credit card operation Vanquis. As for the shareholders, they will be furious about the 75% fall in the share price since last spring.
Unfortunately for Le May, it’s hard to find anything in the latest update that one could call progress. The loss in the consumer credit business after the doorstep debacle will be about £120m, as bad as feared last August. Meanwhile, supermarket chain Sainsbury’s is yanking its partnership with Vanquis and bringing its Argos card in-house.
Provident’s shares, even at the shrunken price – down 13% on Tuesday – look to be an outright gamble on the FCA’s findings. If the regulator decides Vanquis’s controversial “repayment option plan” – a way for borrowers to freeze their debts – was a nasty product that was sold unfairly, there could be heavy redress to pay. Until the FCA speaks, Provident is in limbo.
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