Carillion Ignored Advice to Boost Pension

Consultants said the collapsed company could have afforded ‘materially higher’ pension contributions.

Carillion ignored an assessment from its consultants that the construction company could have contributed more to its pension fund before its collapse, but instead prioritized share price over deficit reduction, according to documents released by a UK parliamentary committee.

In February 2012, Gazelle Corporate Finance, an independent covenant adviser, wrote to Carillion’s board of trustees with advice based on its assessment of the Carillion covenant in respect to recovery plan negotiations, and improving the structure of covenant support.

“Our report highlights the strong affordability of pension deficit contributions under the current recovery plans,” said Gazelle in its letter to Carillion, adding that it could afford to contribute more than £64 million ($91.4 million) per year to all of its pension plans while maintaining a metric of two times free cash flow cover. It also said that this would result in a recovery plan length of six to 10 years, compared to the 15-year plan that had been proposed.

“Carillion can, therefore, afford materially higher deficit contributions,” said Gazelle.

The adviser also said that Carillion was too focused on increasing its share price, and needed to strike a better balance with its deficit reduction strategies.

“Carillion has historically prioritized other demands on capital ahead of deficit reduction in order to grow earnings and support the share price,” wrote Gazelle. “We recommend the establishment of a proportionate link between increasing profitability and the progressive dividend policy, and enhanced deficit repair, structured around a benchmark by which the investment community assesses Carillion.”

On Jan. 15, Carillion entered into insolvency, along with several subsidiary companies in the group. All companies will continue to operate, providing continuity of public services, until further notice. The official receiver has been appointed as liquidator of Carillion Plc, and is now responsible for the day-to-day control and management of the liquidated companies in the group. Partners at PwC have been appointed as special managers to assist.


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