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By James Connington
The Guardian
Debt laden construction firm Carillion has fallen into liquidation after it failed to reach an agreement with creditors during crisis talks over the weekend.
In addition to debts approaching £1bn, the company has an enormous pension deficit. What does that mean for members of its staff pension schemes?
Carillion operates 13 "final salary" pension schemes in the UK, with around 28,500 members, more than 12,000 of whom are already claiming a pension.
Now, the management of those pensions falls to the pensions “lifeboat” – the Pension Protection Fund (PPF) – which will absorb the schemes.
Younger employees are likely to be saving into modern "defined contribution" schemes instead. These are typically less valuable but, crucially, are fully protected in the event an employer goes bankrupt. Savings are the property of individuals, unlike in a final salary scheme where assets are owned by the fund.
Carillion has a reported pension deficit of £587m, but independent pensions consultant John Ralfe warned that the real hit to the PPF could be around £800m.
Steve Webb, of pension firm Royal London, said that the PPF is financially strong enough to absorb Carillion’s pension schemes “with relative ease”, and in line with its normal rules.
Carillion collapse | Key questions
Is liquidation different from administration?
Liquidation is described by insolvency practitioners as a terminal event which takes place when a company’s debts are greater in value than its assets. Including its pension deficit, Carillion has debts of roughly £1.5bn and a market capitalisation of just £61m. The company opted for a compulsory liquidation, whereby a director ask the court to order a business to stop trading.
Administration is often referred to as a rescue of a business, an attempt to in some way keep all, or parts of it, going. If an administration process is unsuccessful - perhaps through a lack of flexibility on the part of creditors - then such a business could end up being liquidated.
Why is Carillion going into liquidation?
The reasons for opting for liquidation over administration are varied. A significant one is likely to be that the Government would not be able to assume control of Carillion’s contracts and appoint other companies if it was in administration, according to Caroline Sumner from insolvency trade body R3. Another is thought to be the complicated structure of its debt, which could be easier to deal with in a liquidation scenario.
Beyond this, opting for liquidation expedites the event and prevents its huge workforce being in limbo for weeks while administrators try to work out which bits of the business are solvent or worth selling.
The decision to opt for a compulsory liquidation for a company of Carillion’s size has been called “extremely rare”. David Birne, form chartered accountancy H W Fisher & Company said it suggests “there is little, if anything, of value within the company to be saved”. He added almost every big insolvency in recent years has been “a move towards administration rather than liquidation”.
Do employees still turn up to work?
If attempts are being made to keep the company going, employees may be asked to attend. In Carillion’s case, the Government has asked the company’s workers to go to work.
If an employee is working for a company which falls into liquidation and they are asked not to attend work, there are a variety of payments they can claim for. These include statutory notice pay, redundancy and up to eight weeks’ wages if an employer has failed to consult collectively with staff. More information is available on the Government website www.gov.uk.
As of March 2017, the PPF had £28.7bn in invested assets, and cash reserves of £6.1bn. It has a funding ratio – the fund’s assets versus its liabilities – of 121pc. The PPF is the backstop for final salary schemes, which pay guaranteed, inflation-proofed pensions for life. Prior to its establishment members of these schemes could be left with nothing if their employers went bust.
However, under PPF rules, not all Carillion employees will receive their full pension.
Tom McPhail, of broker Hargreaves Lansdown, said: “Those yet to reach retirement will typically see cuts of between 10pc and 20pc. There will be an initial reduction of 10pc when they reach retirement, plus they may lose some of their inflation proofing."
Higher earners may also face caps on their pension payments. The current cap stands at £34,655, although for long serving employees it can be higher.
Before the PPF was established in 2005, savers could find themselves left with nothing if the employer behind their final salary scheme went bust.
The PPF also runs the Financial Assistance Scheme, which helps some members of schemes that began to wind up between January 1997 and April 2005. The PPF works like an insurance plan, with schemes paying a levy to cover members in the event that the scheme can no longer pay out.
If your scheme falls into the PPF and you are already retired, your pension will be paid at exactly the same level. If you are yet to retire, payments are capped at 90pc of the promised rate.
However, high earners – not yet retired – face a substantially bigger loss. There is an overall cap on compensation, currently £38,505 for a 65-year-old, or £34,655 where the 90pc cap applies. Savers with long service get special protection: the cap is increased by 3pc for each full year of service above 20 years, up to a maximum of double the usual cap.
Those who have already retired will continue to receive their pension in full.
A spokesman for the PPF said: “We can confirm that we have been notified of the liquidation. We know this news will raise serious concerns for all people involved. We want to reassure members of Carillion’s defined benefit pension schemes that their benefits are protected by the PPF.”
The chairs of the pension schemes are in the process of getting in touch with all members, and will be establishing a dedicated web page to provide information.
The Guardian
Debt laden construction firm Carillion has fallen into liquidation after it failed to reach an agreement with creditors during crisis talks over the weekend.
In addition to debts approaching £1bn, the company has an enormous pension deficit. What does that mean for members of its staff pension schemes?
Carillion operates 13 "final salary" pension schemes in the UK, with around 28,500 members, more than 12,000 of whom are already claiming a pension.
Now, the management of those pensions falls to the pensions “lifeboat” – the Pension Protection Fund (PPF) – which will absorb the schemes.
Younger employees are likely to be saving into modern "defined contribution" schemes instead. These are typically less valuable but, crucially, are fully protected in the event an employer goes bankrupt. Savings are the property of individuals, unlike in a final salary scheme where assets are owned by the fund.
Carillion has a reported pension deficit of £587m, but independent pensions consultant John Ralfe warned that the real hit to the PPF could be around £800m.
Steve Webb, of pension firm Royal London, said that the PPF is financially strong enough to absorb Carillion’s pension schemes “with relative ease”, and in line with its normal rules.
Carillion collapse | Key questions
Is liquidation different from administration?
Liquidation is described by insolvency practitioners as a terminal event which takes place when a company’s debts are greater in value than its assets. Including its pension deficit, Carillion has debts of roughly £1.5bn and a market capitalisation of just £61m. The company opted for a compulsory liquidation, whereby a director ask the court to order a business to stop trading.
Administration is often referred to as a rescue of a business, an attempt to in some way keep all, or parts of it, going. If an administration process is unsuccessful - perhaps through a lack of flexibility on the part of creditors - then such a business could end up being liquidated.
Why is Carillion going into liquidation?
The reasons for opting for liquidation over administration are varied. A significant one is likely to be that the Government would not be able to assume control of Carillion’s contracts and appoint other companies if it was in administration, according to Caroline Sumner from insolvency trade body R3. Another is thought to be the complicated structure of its debt, which could be easier to deal with in a liquidation scenario.
Beyond this, opting for liquidation expedites the event and prevents its huge workforce being in limbo for weeks while administrators try to work out which bits of the business are solvent or worth selling.
What does a liquidation suggest?
The decision to opt for a compulsory liquidation for a company of Carillion’s size has been called “extremely rare”. David Birne, form chartered accountancy H W Fisher & Company said it suggests “there is little, if anything, of value within the company to be saved”. He added almost every big insolvency in recent years has been “a move towards administration rather than liquidation”.
Do employees still turn up to work?
If attempts are being made to keep the company going, employees may be asked to attend. In Carillion’s case, the Government has asked the company’s workers to go to work.
If an employee is working for a company which falls into liquidation and they are asked not to attend work, there are a variety of payments they can claim for. These include statutory notice pay, redundancy and up to eight weeks’ wages if an employer has failed to consult collectively with staff. More information is available on the Government website www.gov.uk.
As of March 2017, the PPF had £28.7bn in invested assets, and cash reserves of £6.1bn. It has a funding ratio – the fund’s assets versus its liabilities – of 121pc. The PPF is the backstop for final salary schemes, which pay guaranteed, inflation-proofed pensions for life. Prior to its establishment members of these schemes could be left with nothing if their employers went bust.
However, under PPF rules, not all Carillion employees will receive their full pension.
Tom McPhail, of broker Hargreaves Lansdown, said: “Those yet to reach retirement will typically see cuts of between 10pc and 20pc. There will be an initial reduction of 10pc when they reach retirement, plus they may lose some of their inflation proofing."
Higher earners may also face caps on their pension payments. The current cap stands at £34,655, although for long serving employees it can be higher.
What is the Pension Protection Fund?
Before the PPF was established in 2005, savers could find themselves left with nothing if the employer behind their final salary scheme went bust.
The PPF also runs the Financial Assistance Scheme, which helps some members of schemes that began to wind up between January 1997 and April 2005. The PPF works like an insurance plan, with schemes paying a levy to cover members in the event that the scheme can no longer pay out.
If your scheme falls into the PPF and you are already retired, your pension will be paid at exactly the same level. If you are yet to retire, payments are capped at 90pc of the promised rate.
However, high earners – not yet retired – face a substantially bigger loss. There is an overall cap on compensation, currently £38,505 for a 65-year-old, or £34,655 where the 90pc cap applies. Savers with long service get special protection: the cap is increased by 3pc for each full year of service above 20 years, up to a maximum of double the usual cap.
Those who have already retired will continue to receive their pension in full.
A spokesman for the PPF said: “We can confirm that we have been notified of the liquidation. We know this news will raise serious concerns for all people involved. We want to reassure members of Carillion’s defined benefit pension schemes that their benefits are protected by the PPF.”
The chairs of the pension schemes are in the process of getting in touch with all members, and will be establishing a dedicated web page to provide information.
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