Pensions and Carillion

The sudden (and in some quarters) expect collapse of Carillion has left many people who thought that they had a pension of a certain amount from the conglomerate finding that their pensions will be significantly less than they expected. It is astonishing that the law seems to permit companies to ignore their pension obligations and give priority to the payment of dividends over their legal obligation to make payments into their own pension funds. Pensions are wages, in reality, deferred wages, and I cannot understand a position where Carillion’s pension funds are in deficit, and apparently have been in deficit for many years, while dividends have been continuously paid to shareholders.

After all, when a person works for a company and it is a term of the employment that the person will get a pension based on final salary or average earnings, what is really happening is that the employee works for lower wages on the basis that he or she will get the agreed pension.

Pension fund deficits seem to be widespread among many large companies.  It is hard to understand how auditors manage to give such companies a clean bill of health. In Carillion’s case it seems that the pension trustee warned that there was a shortfall of around £990 million in the fund. Collectively the Pension Protection Fund’s review of pensions showed that although there were 1,878 schemes in surplus, there were more than double that amount in deficit, and that in the aggregate the deficit was more than £100 billion.

The funds that the pension funds maintain do fluctuate, usually as the stock market fluctuates and as fixed interest investments change. I can understand that fluctuations must be taken into account and over several years you would expect some fluctuation with the company having to put more money in, or if it has put in too much, having a contribution holiday until things were smoothed out. I cannot understand how it is that funds can be in substantial deficit for ten years. Perhaps some regulator is not doing its job properly.

If the pension fund is in deficit, the Pension Protection Fund steps in to help in a limited way. Not all of the pension is covered by the PPF and this means not only does the pensioner not get his or her full pension but also the taxpayer loses the income tax on that part of the pension that is lost.

There needs to be a fix. I would suggest that there should be a more transparent treatment of pension obligations in companies’ accounts and further that companies should not be permitted to pay dividends while pension funds are in substantial long term deficit. This rule will, I am told, deter investment in companies whose pension funds are in deficit, but would that be a bad thing? Should investors be able to reap dividends from companies who do not pay their pension contributions?