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MPs attack pension regulator at Carillion inquiry

Graffiti at the site of the Royal Liverpool Hospital, which was being built by Carillion.
Graffiti at the site of the Royal Liverpool Hospital, which was being built by Carillion. Photograph: Pat Hurst/PA

Carillion’s former finance director considered pension payments as a “waste of money”, MPs conducting a parliamentary inquiry into the collapse of the government contractor have said.

MPs referred to the alleged comment during a sometimes savage evidence session that involved heavy criticism of the Pensions Regulator over its grasp of key facts.

The regulator also said it was investigating whether it could force Carillion bosses to hand back millions of pounds in bonuses to pensioners whose payouts are likely to be cut as a result of the company’s failure.

But it came under fire for a perceived lack of action to force Carillion to pay enough money into its retirement schemes, which are estimated to be nearly £1bn in deficit.

The company’s failure means the schemes will be absorbed by the government’s retirement scheme lifeboat, the Pension Protection Fund, leaving nearly 30,000 members facing cuts of up to 15% to their pension payouts.

What was Carillion?

The Wolverhampton-based firm was second only to Balfour Beatty in size.

It was spun out of the Tarmac construction business in 1999 and steadily took over rivals, such as Mowlem and Alfred McAlpine. It expanded into Canada and built a construction arm in the Middle East.

Carillion then diversified into outsourcing, taking on contracts such as running the mailroom at the Nationwide building society to helping upgrade UK broadband for BT Openreach. It took over running public service projects, ranging from prison and hospital maintenance to cooking school meals. In 2017 a third of its revenue – £1.7bn – came from state contracts. It employs 43,000 people, with more than 19,000 in the UK.

Notable construction projects

• GCHQ government communications centre in Cheltenham (2003)

• Beetham Tower, Manchester (2006)

• HS1 (2007)

• London Olympics Media Centre - now BT Sport HQ (2011)

• Heathrow terminal 5 (2011)

• The Library of Birmingham (2013)

• Liverpool FC Anfield stadium expansion (2016)~

• Midland Metropolitan Hospital in Smethwick (due 2019)

• Aberdeen bypass (due 2018)

• Royal Liverpool University Hospital (due 2018, behind schedule)

Government contracts

• NHS – managed 200 operating theatres; 11,800 beds; made 18,500 patient meals a day

• Transport – “smart motorways” to monitor traffic and ease congestion; work on HS2; track renewal for Network Rail; Crossrail contractor

• Defence – maintained 50,000 armed forces’ houses; a £680m contract to provide 130 new buildings in Aldershot and Salisbury plain for troops returning from Germany

• Education – cleaning and meals for 875 schools

• Prisons – maintained 50% of UK prisons.

As MPs questioned officials from the Pensions Regulator, the work and pensions committee chair, Frank Field, asked if the finance director, Richard Adam, had appeared to be of the opinion that pensions were a “waste of money” during a meeting with trustees.

Three witnesses from The Pensions Regulator said they had not attended the meeting.

The director of case management, Mike Birch, said the regulator threatened to impose increased contributions on Carillion, prompting an increase in payments of £85m spread over 15 years.

“They promised you candy floss in the future,” said Field.

Documents released by MPs earlier in the inquiry showed that trustees believed that an extra £30m a year was necessary to fund the scheme properly.

Field said directors instead chose to pay out “mega dividends” and were boasting to the City about doing so.

He said: “They were shovelling money out to themselves, they were shovelling it to shareholders, why didn’t you get them to shovel it to pensioners?”

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.

The regulator’s chief executive, Lesley Titcomb, who took the job in 2015 after the period under scrutiny, faced criticism for a perceived inability to recall key figures.

She said the organisation should in hindsight have done more to extract higher pension contributions from Carillion.

“We would not have continued so long in that negotiation situation,” she said. “We need to be clearer, quicker and tougher. We will change further.”

Birch said the regulator was seeking new powers to strengthen its ability to impose payments on companies deemed to be paying too little into pension schemes.