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Carillion collapse: will pensions still be paid?

James Connington
Carillion had a stock market value of just £100m prior to its failure  - PA

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.

What is liquidation? | Carillion collapse

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?

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.