LONDON (Reuters Breakingviews) - Carillion’s pension hole is a wake-up call for UK companies and their banks. The construction firm, which went into liquidation on Monday, last year estimated the shortfall in its retirement fund at 587 million pounds. That liability has now been transferred to Britain’s Pension Protection Fund (PPF), which reckons the deficit is nearer 900 million pounds. That’s bad news for Carillion’s creditors – and an omen for companies with similar obligations.
Banks and bondholders which lent Carillion nearly a billion pounds are lining up to recover some of their claims from the company responsible for government contracts including prison repairs, school meals and building the HS2 high-speed railway. They face a tussle with Carillion’s 14 different pension funds, which have over 27,500 members.
The PPF – an industry funded scheme that steps in to guarantee pensions if a company collapses – values the liability according to section 179 of the UK’s Pensions Act. Even though the PPF typically applies a 20 percent haircut to retirement payouts its calculation uses UK government bond yields, which are at low levels. As a result, the shortfall is set to be more than one-and-a-half times Carillion’s most recent estimate, which was based on different assumptions. The PPF’s claim on Carillion’s assets will be almost as large as the company’s outstanding debt.
The scope for pension liabilities to soar when a company gets into trouble should sound the alarm for lenders and investors. Britain’s top 350 companies are estimated to have about 85 billion pounds in unfunded pension commitments, according to a report from London-based adviser Hymans Robertson.
The PPF has limited scope to pick up the tab for failed companies. At its latest update the fund had 30 billion pounds in assets and a 6 billion pound surplus. Taking on Carillion’s 14 different pension schemes will dent that; another six similar-sized corporate failures would wipe out the lifeboat’s reserves.
Carillion’s decision to keep paying bonuses to executives and dividends to shareholders despite its underfunded pension scheme is now under scrutiny. British companies with similar shortfalls should also expect tougher questions from their creditors and investors.
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