It’s curtains for Carillion, with the announcement today that the construction company is going into liquidation.
But is the collapse of Carillion enough to sink the pensions lifeboat?
As many as 43,000 jobs are thought to be at risk as Carillion goes bust, with serious financial consequences for the wider supply chain too.
The financial difficulties arose after Carillion lost money on large contracts and ran up substantial debts.
Another reason for the dire straits Carillion finds itself in now is a huge pension scheme deficit, at an estimated £600m. As a result of the liquidation, the defined benefit pension scheme – actually, 14 different defined benefit pension schemes – will be handed over to the Pension Protection Fund (PPF).
This is the statutory scheme designed to protect pension scheme members if their pension fund becomes insolvent.
Created under the Pensions Act 2004, the PPF is funded by levies on all eligible defined benefit schemes.
This means that the Carillion pension scheme will be ‘rescued’ by other pension schemes, rather than a taxpayer funded bailout.
PPF compensation levels
The PPF pays two levels of compensation, depending on your status within the pension scheme.
Any pension scheme member who is over their normal retirement age or who retired early due to ill health will receive 100% of the pension they are currently receiving.
Other members of the pension scheme will receive the 90% level of compensation capped at a certain level.
For the year from 1st April 2011, the cap is £33,219.36 per annum for members at age 65. From 2013, the cap will also increase by 3% for each year of service over 20 years.
Within the Carillion pension scheme, according to the 2016 Carillion annual report, there are 28,561 members, of whom 12,410 were pensioners and should qualify for 100% of their pension via the PPF.
This does however leave an estimated 16,151 who are likely to see a reduced pension paid in the future by the PPF.
All pension scheme members are likely to experience lower pension increases in the future, under the terms of the PPF, than they might have otherwise enjoyed from their original pension scheme.
Enough to sink the lifeboat?
Despite its large pension deficit, the liquidation of Carillion will not threaten the pensions ‘lifeboat’, the Pension Protection Fund. This is according to Steve Webb, former Pension Minister and now Director of Policy at Royal London.
Steve Webb said:
Carillion workers will understandably be devastated by the announcement of the liquidation of their firm. But they, and retired Carillion workers, can be assured that the pensions ‘lifeboat’, the Pensions Protection Fund (PPF), will help to protect their pensions.
Although there is a big shortfall across the Carillion pension schemes, the PPF is financially strong and will be able to pay out pensions in line with its normal rules. The deficit in the Carillion schemes will not sink the pensions lifeboat.
Although the Carillion deficit is relatively large, the pensions due will be paid over a period of decades.
In the short term the PPF will receive a large inflow if and when it acquires the assets of the Carillion schemes, and it will be able to combine these with its large balance sheet to make sure that pensions can be paid in the coming decades.
Members of the Carillon pension schemes shouldn’t panic or make any knee-jerk reactions in response to the news and change in status of their pension benefits.
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