Carillion highlights the many problems of credit crunch era pension financing

This morning’s news brings us back to a problem which has dogged the credit crunch era. The advent of first official interest-rate cuts and then central bank balance sheet expansion was designed to pull economic demand from the future to the present. This poses an issue for pensions as it does for all long-term savings contracts as they rely on the future. The issue has become clearest when we look at a consequence of the widespread monetary easing which was reflected in a question on Thursday to ECB ( European Central Bank) President Mario Draghi which mentioned “10 Trillion” dollars of negative yielding bonds. If you start doing any sort of maths you find that the negative yields imply you will be getting less back in the future than you pay in now and that is before you factor in the impact of inflation. Who invests to make a loss?

Putting it another way here are the real yields as of today from Germany. Not what economics 101 would predict for am economy in a boom is it?

Just for clarity some of the nominal yields are negative as shown in the chart but even when they go positive they are negative if we allow for inflation prospects and estimate a real yield.


This reflects the conceptual issue as we note that its business model was to take advantage of the era of monetary easing. Take a look at this from the House of Commons Briefing Paper.

Over the eight years from December 2009 to January 2018, the total owed by Carillion in loans increased from £242 million to an estimated £1.3 billion – more than five times the value at the beginning of the decade.

So it was able to borrow on a large-scale as we note an effect of these times which is often forgotten. Not only did it become cheaper to borrow for many purposes but there was an availability of credit meaning that Carillion could borrow ever more as well as cheaply. As an aside the banks would no doubt have been happy to make some business lending but as I reported many years ago now about Japan you don’t always get the sort of business lending you want as we note what it did with it.

In the eight years from 2009 to 2016, Carillion paid out £554 million in dividends, almost as much as the cash it made from operations. In the five years from 2012 to 2016, Carillion paid out £217 million more in dividends than it generated in cash from its operations.

Now let us skip to the pensions situation.

Carillion has 13 UK defined benefit pension schemes with 27,000 members. In January 2018, the trustees estimated that the schemes’ Pension Protection Fund (PPF) deficit (the shortfall compared to what is needed to pay PPF compensation levels) was up to £900 million

So shareholders got dividends and we know the directors were well paid and were able to think of the future. From the Financial Times.

Allowing clawback conditions to be changed a year ago, striking out corporate failure as a reason to take back bonuses.

Yet they were somewhat more forgetful about the futures of others.

When did this start?

Rather concerningly the problems were long-standing. From Josephine Cumbo in the Financial Times.

In written evidence to the Committee, Robin Ellison, chair of Carillion pension scheme trustees, said the trustees had tried to agree higher funding contributions from the company in 2008, 2011 and 2013.

Even worse there are higher estimates of the problem emerging from the woodwork.

In his letter to the committee, Mr Ellison revealed that the funding shortfall for five of the six Carillion pension funds he chairs widened from £508m in 2013 to around £990m in 2016 when measured on a “technical provisions” basis. This is the measure used to set contributions from the employer every three years. However, the “buyout” deficit, or the measure used by the Pension Protection Fund to value a creditor claim for the pension debt, is nearer £2bn according to Mr Ellison.

This brings us to the subject of the regulator as we wonder what it has been doing over the past decade?

On Monday, the Work and Pensions Select Committee published new evidence claiming that the Pension Regulator (TPR) was alerted to problems with the company’s main pension plans as long ago as in 2008, when the scheme’s trustees and the company were locked in a funding dispute.

We seem to be back to the issue of who regulates the regulators as this looks like the behaviour of yet another paper tiger.

What is a pensions deficit?

In theory this is easy as it is simply an expected future shortfall. The problem is that more than a few variables are unknowable such as investment returns, inflation and interest-rates and yields in the future. The modern era started in 1997 with the Minimum Funding Requirement which had an impact on the markets I was working in/on at the time. From HM Parliament.

it appears to have created some extra demand in the long end of the gilts market, which may have contributed to the depression of yields.

This led to the view that one of the aims of the MFR was to support the Gilt market. Then another issue arose which has continued which is the use of yields to value pensions as only a year later there was a big change for dividend yields in pension funds.

the dividend yield is no longer a reliable measure of “value” for UK equities – this is partly due to the abolition of tax credits on UK dividends in the July 1997 Budget, which
has changed companies’ behaviour over profit distribution, and partly because investors are willing to value shares on future long-term expectations, despite the
absence of dividends or profits

More recently we have seen corporate bond yields used for pension deficits but this has brought its own problems as central banks have intervened here. Firstly by making them more attractive by cutting interest-rates then reinforcing it via balance sheet expansion via bond buying. Then explicitly by actually buying corporate bonds as the Bank of England did in August 2016 and less obviously via the ongoing ECB programme as UK companies do issue Euro denominated bonds.

The irony of all this is that if you had bought long-dated UK Gilts two decades ago you would have done really rather well especially if you sold to the “Sledgehammer” buying of the Bank of England as it sent the market to all time highs with its panic inspired move.

What about direct contribution pensions?

These are simply ones where you put money in ( and if lucky your employer does as well) and it is invested and you make or loss depending on how the investments do. This is different to the schemes above where the employer promises a return based on your salary or earnings. According to the Financial Times just over a week ago the costs here are not quite what we are told.

The total cost of investing in popular funds, including those run by Janus Henderson, BlackRock and Vanguard, is up to four times higher than first thought, FTfm can reveal today. The Mifid II trading rules, which came into force this month, have forced asset managers to disclose hidden charges.

Some care is needed as platform charges are not caused by the fund management group but there are charges which are far from transparent.


There is much here to consider. The concept of investing for the future is simple and yet the credit crunch era has made it more complicated. For example there was a time ( and no doubt regulatory rules still suggest it) that the safest investment was a government inflation or indexed linked bond. No we see a time when in the UK and Germany you are pretty much guaranteeing yourself a loss in real terms if you hold them to maturity. If we look at conventional bonds they yield so little there is no fat on the bone as real yields are hard to come by.

Ironically this will have benefited some as if you had been holding bonds over the ,long-term then you are quids ( Dollars, Euros,Yen) in as we have been in a bull market. More recently equities have joined that party but here is the rub. In my opinion central baking easing has helped drive this too as current investors/pensioners benefit from borrowing from future returns. The claimed “wealth effects” must make it harder to make money going forwards as we note that like in Japan zombie companies which is what we are increasingly looking at with Carillion were indeed propped up.

Meanwhile I would suggested that especially if we consider their student debt burden millennials are unlikely to be able to buy a home and invest in a pension simply by giving up takeaway coffee and avocado toast.

Also I am pleased to report that the spirit of Sir Humphrey Appleby is alive and kicking at the UK Pensions Regulator.

The Regulator said: “It is too early to comment on whether with different information we could or would have taken action in the past or whether we will take action in the future, based on any new information that comes to light.” ( h/t @JosephineCumbo )



27 thoughts on “Carillion highlights the many problems of credit crunch era pension financing

  1. Wonder if the little man can get a decent line of credit for his business, borrow to the hilt to buy his own goods to make his company look profitable, pay himself more than his company could if we lived in a capitalist nation, do this for a few years until a decent sum to retire on has been hidden away then let the business go bankrupt.

    Would certainly beat being productive or working for a living.

    • Hi Arthur

      The problem would be that the little (wo)man would probably go to jail for this in the same way that benefit cheats do sometimes but those who fiddle in the tens of millions or more seem toinvariably avoid. It is plainly wrong but has been true for as long as I can remember.

  2. …..opinion central baking easing ….
    so now we have the concept of centralised book cooking? So that’s what is going on – we can all be toast together.

    Joking apart, non productive bulk money manipulation ‘for the future’ just shifts any end point to when no one could possibly be responsible for any outcome, good(?) or bad. How on earth does anyone aged under 45, to pick an age, make a long term decision on their long term future, when there are pressing payments queuing up on a day to day basis? I’m glad I don’t have that problem.

    • Hi DL

      Maybe central banks should have a millennial representative to represent those who will be alive when we reach some of the tin cans we have kicked into the future. After all the Bank of England has bought Gilts out to 2068 so unless they have a change of heart and adopt my suggestion for example the consequences will be with us for at least the next 50 years.

  3. I’ve long felt the entire edifice of the pension industry should be swept away and replaced with a decent state pension augmented by ‘Super ISA’s’ (i.e. with far larger allowances and greater range of investments) which you can access at any time of your life.

    The pension life assurers, the employing companies, the state itself as employer and provider of the ‘second pension’ have ALL proven themselves to be craven and inept to the extreme. The fundamental issue being the length of time between promises being made and being acted on is too long coupled with the sheer complexity.

    My aim would aim to remove all these self interested actors and reduce all the costs associated with pension provision that could be directly returned as value when the time comes. To help pay for the improved State Pension, the government itself could decide to run a National Wealth Fund with the higher level of contributions (no tax refunds as there will be no private pensions). Better off, more sophisticated investors can still avail themselves of ‘Super ISA’s’ to augment their pensions.

    • The costs of pension fund providers are horrific. I left an employer 25 years ago and, for various reasons, left my pot in the scheme. I have been charged nearly 2% annually ever since. You can see the effect over time, ie they get rich at the expense of my pension

      • I worked in the pension review for a well-known insurance company and there were one or two instances of people who had invested for a very short time and then left it so there was only a very little in the pension (less than 1K). Meanwhile charges meant that their pension pot had reduced to zero!)

  4. Carillion seems to sum up neatly the neo-liberal age and everything that’s wrong with it. Strong and stable (if you’ll excuse the expression!) pensions looted, preferential tax treatment for debt over equity, complete breakdown of corporate responsibility, QE and ZIRP making investment on fundamentals impossible, regulators and auditors asleep at the wheel and last but not least, the public purse covering private risk.

    It’s all going swimmingly isn’t it?

    • Prior to the extreme neoliberal age when you drove past roadworks people were actually working on constructing the road. For the last 15 years you can drive past 10 mile of roadworks and you’ll be lucky to see more than a handful working.

      Surely getting contractors to get the job done may have helped their bottom line!

  5. Tens of millions of people have given up a lifetime’s worth of fun to provide security in their old age.
    They were, in fact, only paying for someone else’s lifetime of fun.
    Jail the thieving bastards.

    • Forbin – Robert Maxwell was an early employer of mine. I took a “dislike” (polite) to the man when he took over the Company I worked for. I was “fortunate” – at age 28 I cashed in my pension plan to set up in business (as opposed to borrowing from a bank). I was told (parents, work colleagues) I was being stupid, I would live to regret that decision.

      Correct – nothing changes – though after the Maxwell debacle – it was supposed to have changed, yet, BHS to Carillion shows otherwise.

      As for personal pension plans – Looking back, I paid in £300/month (my mortgage was about the same amount monthly) – over 30 years ago, that was some sum of money – the youth of today, regardless of their employer paying in – will be hard pushed to get anywhere. The only people who do benefit are the plan holding companies.

      I fully agree with comments made by Hotairmail and therrawbuzzin.

  6. I was reading Private Eye on the Carillion mess and, although not highlighted anywhere else, the Mr Ellison above, who runs the pension trustees, agreed to the pension contribution holiday. Surely he must have known that the company was in trouble then?
    The last people to know, of course, are the poor bloody infantry…

    • Hi James

      Always. As to pension fund trustees I think that care is needed as whilst we may ask questions they did not cause the problems. However this from Mr.Ellison in IPE from March last year does not reflect that well on him as we note what was about to happen.

      “When it comes to pensions and investment, Ellison has strong views, underpinned by a belief in laissez-faire economics. On several occasions he has suggested that the current regulatory framework entices pension schemes to invest excessively in government securities.

      This is due to conflicting objectives between regulators and pension schemes. “The objective of the regulators is to protect the Pension Protection Fund (PPF ). If we go into government securities, that helps them balance out the numbers,” argues Ellison.

      He did not conceal his aversion to excessive regulation during his chairmanship of the National Association of Pension Funds, now the Pension and Lifetime Savings Association, between 2004 and 2007. “

  7. Nothing will change until directors and senior management are taken out of stock option schemes and schemes that tie their bonus’s to short term gain. I have had pressure exerted on me in the past to squeeze extra profit out of a business near year end to hit elevated bonus targets. I have also witnessed the ramping of company results when stock options mature. It is easy to do this legally and in full compliance with auditing rules but it is not good for the long term health of the business concerned. Time and again I read about companies who’s management have personally done rather well just before the company runs into all sorts of problems. It will continue until bonus targets are based on long term company performance, debtor management and the achievement of specific tangible goals that enhance the long term viability of the organisation.

    • Hi Pavlaki

      I agree that the whole issue of bonuses for short-term performance is a can of worms. There was a time that Warren Buffett was in our camp as well as I recall him arguing against them but I am not sure if he has kept the faith.


    The Pension Regulator has questions to answer, but he’s not alone; at any point, Ellison’s public resignation would have forced both Carillion’s and TPR’s hand.
    Then again, in today’s business world, why would we expect any integrity, or even fulfilment of legal, fiduciary duty anywhere there’s a coin to turn?

  9. Maxwell/Mirror Group;Philip Green/Top Shop;Equitable Life; and now Carillion. Pensioners robbed while the regulator looked the other way, either by incompetence or design, it makes no odds to those who lose out, but the story remains the same.
    Does anyone really think companies will make good the deficits in their pension schemes over the coming decades? This will be the next major scandal and financial collapse in this country, companies either cannot, or will simply refuse to come up with ever increasing sums of money to stabilise schemes, yet another often overlooked casualty of QE and ZIRP, but not yet apparent is the strain they have put on pension funds, but like PFI, the effects only become apparent many years later.

    • Hi Kevin

      These scandals are invariably not a surprise to those in the know. I recall doing business with a pensions management company back in the day that kept assuring me that Equitable Life could not be achieving the returns claimed. I suppose a bit like engineers elsewhere could not match the diesel data from VW. Yet somehow they keep happening and as you say we have the central banks kicking the can as far as they can.

  10. Carillion is one of quite a number of cases where the venality of the management is contrasted with a huge pension deficit and throws a bad light on the management and, in this case, seems not undeserved.

    However, looking at pensions generally, it is no easy thing to make a DB scheme work in the real world where time horizons are so extended (how confident are you forecasting forty or fifty years ahead?). Have we been lucky since the War that most have worked? after all the deficits have largely occurred in the last ten years of ZIRP and who could have forecast that? My pension is a DC based one; I have no DB entitlement and I had to take whatever I could get at the time I buy an annuity but that is the nature of the contract – far,far less than twenty years ago but far more than now and the difference between twenty years ago and now is considerable, very considerable.

    Perhaps these DB schemes have lulled folk into a false sense of security and some were bound to fail, even without greedy management to help disaster along its way and this now has to be rethought and maybe people need to save more than hitherto.

    • Hi Bob J

      In some ways it is just simple mathematics. There was a time when a contribution level of 20% of salary was considered plenty to pay a final salary DB pension. Not it is considered to be 40% and sometimes more so we have gone from one extreme to another in far less than 40 or 50 years!

  11. Hi Shaun great thought provoking article as usual.
    The reason for the trouble defined benefit schemes are in trouble are primarily the following.
    The end of tax free dividends for pension schemes-Gordon Brown.
    Light touch regulation-Gordon Brown.
    The criminal suppression of interest rates by Central Banks creating trillions of dollars worth of money from the magic money tree.
    European junk bonds are yielding less than US Treasuries which have also been grossly manipulated.
    DB schemes were great and could have prospered indefinitely but they are victims of a crumbling economic and monetary system that has been engineered to benefit the corporations the banks and the very wealthiest in society.
    The common denominator in all these failures is debt and the people in charge think that lower interest rates are the answer?
    No they don’t but they are suppressing interest rates to keep the whole thing going…there can be no outcome other than eventual default for companies individuals and Government but at least Government has the magic money tree until confidence is lost in the currency.
    All the problems we are facing are caused by debt now 327% of global gdp and rising rapidly ,I am like a broken record regarding the debt because nothing else matters,stock prices,bond prices/yields these are only on paper they are meaningless until you have realised the asset and when the debt tsunami comes these assets will be virtually worthless they are only paper values .

    • Hi Private Fraser and thank you

      One of the roads forwards is that in the next crisis interest-rates go negative and stay there which will pose all sorts of questions. Will people try to take their money out of banks and will they be allowed to? Watch this space…..

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