The collapse of Carillion PLC with more than half a billion pounds of unfunded pension commitments might increase pressure on some of the UK’s biggest companies to plug their own funding gaps.
The construction giant employs almost 20,000 people in Britain and has a pensions shortfall of £587 million (US$809.6 million).
The government-backed Pension Protection Fund (PPF) will probably now step in to help bridge the shortfall in the company’s defined benefit schemes, but under its rules, future pensioners face a 10 percent drop in payouts, as well as a cap of about £35,000 per year.
The issue of pension shortfalls is a political hot potato in the UK that last year flared up again when Toys “R” Us Inc’s British unit avoided bankruptcy by agreeing to pump money into its retirement fund for workers.
BT Group PLC’s shares last year tumbled after its pension deficit widened.
“Each time there’s a high-profile case, it puts more pressure on politicians and the pension regulator to do something about it,” said Jon Hatchett, head of corporate consulting at London-based pension consultancy Hymans Robertson.
FTSE 350 companies have about £85 billion in total unfunded pension commitments, Hymans Robertson said.
That figure reached a record-high of £165 billion pounds after the Brexit vote, but has since fallen amid an improvement in the shares and bonds that make up the bulk of retirement pots’ investments.
“We’ve generally been heading toward calmer waters, with pension scheme funding positions improving over 2017, but any high-profile corporate collapse is going to increase scrutiny,” said Graham McLean, head of scheme funding at consultancy Willis Towers Watson PLC.
This might “ratchet up the tension between the contributions paid into pension schemes and distributions to shareholders,” he added.
Former British minister of state for pensions Steve Webb, who is now director of policy at insurer Royal London Group, questioned Carillion’s policy of increasing shareholders’ dividend payouts as its pension deficit widened.
Separately, Carillion was on Monday criticized by the Institute of Directors, which said that there were signs that the firm’s management relaxed reduction conditions for executive bonuses as the company ran into trouble.
“There’s an argument that the balance between dividends and the pension scheme is wrong in some companies,” Webb said.
Regulators need to take a “tougher line” and challenge companies “more firmly,” Webb added.
Carillion’s eligible pension schemes will probably enter an assessment period, where the PPF will decide on compensation, a spokeswoman for the fund said by e-mail.
The PPF has about £6 billion in reserves and manages about £28 billion of assets to help it generate a return.
While the PPF can fund the failure of a few large schemes, a pickup in bankruptcies could overwhelm it, particularly as the manufacturing companies most at risk from a so-called hard Brexit have a disproportionate number of defined benefit plans, former British minister of state for pensions Ros Altmann said.
“I don’t believe the government has considered the dangers of this to the wider corporate landscape, but perhaps the failure of Carillion will focus minds more carefully on the massive risks the UK and its pensioners might face,” Altmann said by e-mail.
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