22. Carillion operated two main defined benefit (DB) pension schemes for its employees, the Carillion Staff and Carillion 'B' schemes.109 In April 2009, Carillion closed the schemes to further accruals and from that point employees could instead join a defined contribution plan.110 Carillion still retained its obligation to honour DB pension entitlements accumulated before that date. The schemes had combined deficits, the difference between their assets and liabilities, of £48 million in 2008, £165 million in 2011 and £86 million in 2013.111
23. Those deficits, while undesirable, were not unusually high by DB standards and may well have been manageable. Through its acquisitions policy, however, Carillion took on responsibility for several additional DB schemes in deficit. When the company entered liquidation in 2018, it had responsibility for funding 13 UK DB pension schemes.112 All but two of those are likely to enter the Pension Protection Fund (PPF), which pays reduced benefits to members of schemes that are unable to meet pension promises owing to the insolvency of the sponsoring employer.113 The PPF, which is part-funded by a levy on other pension schemes, will take on responsibility for both the assets of the schemes and the liability of paying the reduced pensions. The PPF estimates the aggregate deficit for PPF purposes will be around £800 million, making it the largest ever hit on its resources.114
Box 1: The Pension Protection Fund (PPF)
| The PPF protects the pensions of members of DB pension schemes. If the sponsoring employer of a scheme becomes insolvent, and the schemes cannot afford to pay pensions at least equal to PPF compensation, the PPF compensates them financially for the money they have lost. PPF benefits are generally lower than in the failed scheme: if someone had already reached pension age when the company went bust, they would be paid their full pension, but will usually have lower annual indexation. Schemes members yet to reach pension age face a 10% haircut to their pensions as well. There is also a cap on annual compensation. As well as taking on liabilities for paying reduced pensions, the PPF takes on the assets of the failed schemes. To fund pension payments, it invests those assets, seeks to recover money and other assets from the insolvent sponsors, and charges a levy on pension schemes eligible for the PPF. The levy is risk-based and acts as an insurance premium. In March 2017, the schemes insured by the PPF had a combined deficit on a PPF basis of £295 billion. In 2018-19, the PPF expects to collect £550 million of levy in total across all eligible schemes. The hit from the Carillion schemes will be larger than that. However, the PPF has a reserve of £6.1 billion, making it "well-placed" to absorb the Carillion schemes. The PPF projects a 93% probability of being fully-funded by 2030.115 |
24. The most significant of the additional schemes acquired were sponsored by Mowlem and Alfred McAlpine. Mowlem was purchased in 2006, when it had a year-end pension deficit of £33 million.116 Alfred McAlpine was purchased in 2008, when it had a year-end deficit of £123 million.117 By the end of 2011, the combined deficit on these two schemes had grown to £424 million.118 On 6 April 2011, a single trustee board, Carillion (DB) Pension Trustee Ltd, was formed to act for the two main Carillion schemes, Alfred McAlpine, Mowlem and two additional schemes: Bower and the Planned Maintenance Engineering Staff schemes.119 These schemes together accounted for the large majority of both the total Carillion deficit and total pension membership.120 We focus in this report on those schemes and the negotiations between Carillion and Carillion (DB) Pension Trustee Ltd (the Trustee).
____________________________________________________________________
109 The Carillion 'B' scheme was only available to executive directors and other senior employees.
110 Carillion plc, Annual Report and Accounts 2009, p 102
111 Analysis of scheme annual report and accounts.
112 Carillion Group Section; Permarock Products Pension Scheme; Carillion "B" Pension Scheme; The Carillion Staff Pension Scheme; Alfred McAlpine Pension Plan; Mowlem Staff Pension and Life Assurance Scheme; Planned Maintenance Engineering Limited Staff Pension And Assurance Scheme; Bower Group Retirement Benefits Scheme; The Carillion Public Sector Scheme; The Mowlem (1993) Pension Scheme; Prudential Platinum Carillion Integrated Services Limited Section; Carillion Rail (Centrac) Section; Carillion Rail (GTRM) Section. Carillion also had DB pension obligations in Canada following acquisitions there.
113 Letter from PPF to the Chair, 20 February 2018
114 Letter from PPF to the Chair, 3 April 2018
115 Letter from PPF to Chairs, 20 February 2018 and PPF Annual Report and Accounts 2016-17
116 Mowlem Staff Pension and Life Assurance Scheme, Report and financial accounts 2007, p 8
117 Alfred McAlpine Pension Plan, Actuarial Valuation as at 31 December 2008, p 2
118 Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December 2013, p 3
119 Letter from Carillion (DB) Pension Trustee Ltd to the Chair, 26 January 2018
120 Trustee data shows that at the end of 2013, total membership across these schemes was 20,587. Carillion plc Annual Report and Accounts 2013 show that total membership across all schemes was 28,785 at the end of 2013.