A joint report by the work and pensions committee and BEIS committee says sponsoring companies are able to call TPR’s bluff and avoid deficit reduction payments because the regulator rarely uses its powers to enforce them. The report says Carillion was a ‘classic case’ for TPR to use its powers proactively, under section 231 of the Pensions Act 2004, to enforce an adequate schedule of contributions.
The report, authored by Frank Field MP and Rachel Reeves MP, shows a lack of confidence in TPR chief executive Lesley Titcomb, saying it is ‘far from convinced’ that current leadership is capable of bringing in the cultural change needed at the organisation.
The report highlights the fact that TPR handled 263 clearance cases in 2005–06, but just 10 in 2016–17. It says ‘this does not reflect a marked decline in corporate activity, but a realisation on the part of companies and their lawyers that threats from TPR are hollow: it is a paper tiger. There is little incentive to seek clearance to avoid being subject to powers that TPR has very rarely deployed with success’.
The report says TPR has not done enough to learn the lessons of the collapse of BHS – which led to a 2016 W&P committee report recommending that the regulator should regard deficit recovery plans of over ten years exceptional and that trustees should be given powers to demand timely information from sponsors. It also recommended stronger powers for TPR in areas such as levying punitive fines to deter avoidance, intervening in major corporate transactions to ensure pensions are protected, and approving the consolidation and restructuring of schemes. Many of these recommendations of that report were adopted by the Government in its March 2018 White Paper, Protecting Defined Benefit Pension Schemes. The Government now intends to consult on the details of the proposed additional TPR powers.
The report acknowledged that TPR now has different leadership than at the height of its Carillion failings, Lesley Titcomb having been appointed Chief Executive in 2015 and has been given additional resources, including an additional £3.5 million in 2017–18 to support frontline casework.
It noted that TPR has prioritised more proactive regulatory work and has set corporate performance indicators regarding quicker intervention in DB schemes that are underfunded or where avoidance is suspected and that its performance measures now incorporate both the proportion of pension scheme members receiving reduced compensation and the extent to which schemes are adequately funded. It also accepted that the regulator has undertaken a period of self-analysis and change under the guise of the TPR Future programme.
But the report says it was deeply concerned by the evidence it received from TPR, which sought to defend the passive approach they and their predecessors had taken to the Carillion pension schemes. It noted that in 13 years of DB scheme regulation, TPR has issued just three Warning Notices relating to its section 231 powers, and has not seen a single case through to imposing a schedule of contributions. It says ‘it is difficult to perceive a threat from TPR of using its section 231 powers as a credible deterrent. We have little doubt that the likes of Richard Adam took TPR’s posturing with a pinch of salt; other finance directors with his dismissive approach to pensions obligations would do likewise’.
The report says: “The case of Carillion emphasised that the answer to the failings of pensions regulation is not simply new powers. The Pensions Regulator, and ultimately pensioners, would benefit from far harsher sanctions on sponsors who knowingly avoid their pension responsibilities through corporate transactions. But Carillion’s pension schemes were not dumped as part of a sudden company sale; they were underfunded over an extended period in full view of TPR. TPR saw the wholly inadequate recovery plans and had the opportunity to impose a more appropriate schedule of contributions while the company was still solvent. Though it warned Carillion that it was prepared to do, it did not follow through with this ultimately hollow threat. TPR’s bluff has been called too many times. It has said it will be quicker, bolder and more proactive. It certainly needs to be. But this will require substantial cultural change in an organisation where a tentative and apologetic approach is ingrained. We are far from convinced that TPR’s current leadership is equipped to effect that change.”
Work and Pensions Committee chair Rt Hon Frank Field MP says: “Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners. They rightly face investigation of their fitness to run a company again. This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cosy club of auditors, conflicted at every turn. Government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion.”
BEIS Committee chair Rachel Reeves MP says:
“Carillion’s collapse was a disaster for all those who lost their jobs and the small businesses, contractors and suppliers left fighting for survival. The company’s delusional directors drove Carillion off a cliff and then tried to blame everyone but themselves. Their colossal failure as managers meant they effectively pressed the self-destruct button on the company.
“However, the auditors should also be in the dock for this catastrophic crash. They are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems. The sorry saga of Carillion is further evidence that the Big Four accountancy firms are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope.
“KMPG, PwC, Deloitte and EY pocket millions of pounds for their lucrative audit work – even when they fail to warn about corporate disasters like Carillion. It is a parasitical relationship which sees the auditors prosper, regardless of what happens to the companies, employees and investors who rely on their scrutiny. The Competition and Markets Authority must now look at the break-up of the Big Four accountancy firms to help increase competition and deal with conflicts of interest.
“The collapse of Carillion exposed terrible failures of regulation. The Government needs to stop dithering and act to ensure regulators are up to the job of intervening before companies fail, rather than trying to pick up the pieces when it is too late.”
Shadow Pensions Minister Jack Dromey MP says: “The Pensions Regulator (TPR) failed to intervene, even when Carillion’s trustees asked it to, failed to act until after the collapse and failed to protect pension scheme members’ benefits.
“Now, the Pension Protection Fund is facing an £800m bill, the largest in its history, and thousands of pensioners will suffer reduced incomes in retirement.
“This is the latest in a long line of failures by TPR and it is time the Government took action to fundamentally reform the Regulator or thousands more workers will lose out on their pensions.”
TPR chief executive Lesley Titcomb says: “We actively seek to learn lessons to better protect members of pension schemes. In the past the balance between members and employers was not always right. The report underlines the significant changes already made at TPR but there is more work to do.
“We are now a very different organisation; we are clearer about what we expect, quicker to intervene and tougher on those who do not act in the interest of members. We have reinforced our regulatory teams on the frontline and are embedding a new regulatory culture. We sought stronger and clearer powers on scheme funding from DWP and we are working with the Government on how to implement the changes in the White Paper, alongside our wider changes to how we regulate.”