The aftershock of Carillion

By Chris Austin

The collapse of Carillion has raised dozens of difficult questions. Answers, though, seem to be far trickier to track down.

How has it come to this? Who should shoulder the blame? What does it mean for workers’ pensions? And is it time for a root-and-branch change to the way tenders are handed out by big companies, to small contractors?

The disintegration of the UK’s second biggest construction company has hit a number of Shropshire-based tradespeople.

Carillion has a multi-million pound mountain of cash owed to its partners, sub-contractors and suppliers – because the company only self-delivered 10-15% of its services.

And then there’s the huge black hole which is going to impact on the pensions of its innocent band of workers.

Analysts say the scale of the debts will undoubtedly bring into question the sustainability of sub-contractors who considered Carillion a key client, yet will now receive just pennies for each pound of monies owed.

Paul Barton, from Telford, is among them. He’s a one-man band who works for a small West Midlands contractor which was employed on Carillion’s Midland Metropolitan Hospital project in Birmingham.

“To Carillion, this was relatively small fry, but this job was going to be nearly half my annual turnover,” he say.

“It’s bad enough now having to suddenly go out and try to find alternative work – but because so many other people are all in the same boat, the market is flooded with people with the exact same skills as me, so we are all scratching around for the same jobs at the same time.

“Meanwhile, the fat-cats who caused this mess, and buried their heads in the sand presumably pretending it was all going to go away, are still finding enough money to heat their swimming pools.”

The use of cash retentions has been commonplace in the construction industry for years, and Jonathan Hyndman, partner at law firm Rosling King, says: “Some £3 billion of retentions remain outstanding in the UK construction industry at any one time.”

Does he think the collapse of Carillion will bring about a change?

“By deducting and retaining a percentage of the value of the works from interim payments due to the contractor during the construction phase, developers can be seen to enjoy an element of protection against late completion and defects arising during the rectification period,” he says.

“Similarly, main contractors will deduct and retain a percentage from each interim payment due to their subcontractors again, to be released when the subcontract works have been completed and when the subcontractor has made good any defects. 

“Widespread and persistent failures to release retentions on time or at all, whether as a result of simple breach of contract or the insolvency of the party holding the retention, has encouraged contractors at all levels of the supply chain to price the risk of their retention not being released into the contract sum.” 

Reform of retentions in construction contracts has long been demanded, and The Construction (Retention Deposit Schemes) Bill received its first reading in the House of Commons in January.

The industry insists that Carillion’s collapse means it is imperative that this is fast-tracked into the statute books. 

The intention of the bill is to introduce secondary legislation requiring cash retentions to be paid into a Government-approved scheme - and so ring fencing them from the other assets.

The idea is that the contractor will still be incentivised to complete on time and remedy defects but in the event of the client’s insolvency, the cash retention, held in a Government-approved scheme, would fall outside the insolvency process and would be available for release. 

The proposals have met with widespread support from the construction industry which feels reform of retentions is overdue and welcomed. Sadly, though, even if it is now pushed through, it will come too late for Carillion’s sub-contractors and suppliers. 

“It is not for the first time the spotlight has unwelcomely been shone on the outsourcing sector,” says Mark Maunsell, from advisory practice Clearwater International.

“In fact, in the last couple of years it has been difficult to keep leading players out of the headlines as the companies have been tarnished by profit warnings, redundancies, accounting scandals and malpractice.

“Nothing, however, compares to Carillion. The consequences are far reaching and unprecedented, and raise a number of pertinent questions.”

For example, he points out that Carillion expanded rapidly through debt-funded acquisitions in new geographies and service lines, helping to mask the true underlying performance of the business.

“Its debt levels rose rapidly, and a bid for rival Balfour Beatty in 2014 was an audacious attempt to further disguise its financial health.” 

Carillion attributed a slowdown in orders and poor performance to Brexit and the change of government.

Whilst the claim may have been used as somewhat of a scapegoat (Carillion won £2 billion worth of contracts after the vote), data does indicate that skills shortages in the sector have been exacerbated following the referendum.

It also now brings into question the security of the 2,000 apprentices in the process of completing a government funded contract Carillion had been paid £6.5 million to deliver. 

The news that Carillion paid £72 million in dividends to shareholders as recently as last summer, despite ailing performance and a growing pension deficit, brings into question its corporate governance, Mr Maunsell adds.  

“There is no doubt that the impact of Carillion’s failure is colossal and will take years to unwind. The key question though of whether lessons have been learned remains to be seen.”

Barclays is one of many organisations to have set up helplines to provide advice to those worst hit by the Carillion collapse.

Andrew Gornall, head of SME banking for Barclays in the county says: “This is a difficult outcome for all those involved, and it is having an impact on many of the connected suppliers and stakeholders.

“Some of the affected businesses are our clients and we want to make sure that we stay close to those impacted and provide them with all the support we can.

“It’s important that we understand the nature and extent of the impact and their plans to manage the situation, along with any support they may ask from us and/or heightened risk across facilities we extend to them.”

Telford & Wrekin Council had no live contracts with Carillion at the time the liquidation was announced, but points out that a recruitment and redundancy group operates in the area, working to support businesses as they recruit, retain or go through job losses.

Councillor Lee Carter, Telford & Wrekin Council’s cabinet member for economic development, says: “We are very aware that this a difficult time for everyone affected by the liquidation of the second largest construction company in the country.

“We are very mindful that there is a knock-on effect for a range of businesses who had contracts or ventures with Carillion and the support is available to employees of all companies of all sizes.”

And what of the 28,500 employees who have a pension with the collapsed company, including many here in Shropshire?

Robert Palmer, a director at the West Midlands office of Quantum Advisory, says: “This unfortunate story, which is seemingly becoming more frequent, is akin to what happened with BHS but on a much bigger scale.

“BHS’s liabilities when it went into administration were in the region of £500 million.

“Comparably, Carillion operated 13 final salary pension schemes in the UK which accumulated liabilities of around £3.5 billion, with assets of around £2.5 billion.

“All members from the 13 defined benefit schemes will now get Pension Protection Fund compensation, and therefore it will be down to the PPF to plug the shortfall.

“For those above normal retirement age, they will continue to receive their pension in full, but for those yet to retire or those who have retired in good health but are below normal retirement age will receive lower pension benefits than anticipated, with a minimum 10% drop immediately. Most members will also have lower increases in the future.

“There is some good news in this terrible tale, in that the PPF currently has a surplus of around £6 billion so it can easily take on Carillion’s pension liabilities at the current time.

“However, the subsequent impact could be an increase in PPF levies for other defined benefit schemes in the medium to longer term.

“I am surprised more wasn’t done by the government to stop the collapse of Carillion, particularly given their significant involvement with Tata Steel, although that may have been a political move to ensure that steel production remained in the UK.”

The collapse should ‘trigger alarm bells’ for pension savers across the UK, according to the chief executive of one of the world’s largest independent financial advisory organisations.

Nigel Green, the founder of deVere Group, says: “Whilst the PPF is an important and valuable support, UK final-salary pension schemes have an enormous deficit black hole, which raises the inevitable question, ‘how many more big hits can the PPF take?

“This deeply depressing, and now all-too-frequent, turn of events should be a wake-up call to pension savers.

“The fact of the matter is that, despite rising stock markets and a positive global economic outlook, companies – including some of the biggest brands and household names – are severely struggling to fund their pension funds for a variety of reasons.

“These include, amongst other factors, falling gilt yields, which have driven up transfer values.  This is good news for those wishing to take money out of the defined benefit scheme, but these larger pay-outs put further pressure on the pension schemes themselves – many of which are already critically underfunded.

“To help avoid unwelcome surprises, I would suggest that pension savers regularly and thoroughly review their pensions to become aware of what could represent a risk to their retirement income.”

So, will lessons be learned as the dust begins to settle on the situation? According to the Federation of Master Builders, they simply must.

Chief executive Brian Berry says: “Carillion’s liquidation raises serious questions for the Government, not least about its over-reliance on major contractors.

“The Government needs to open up public sector construction contracts to small and micro firms by breaking larger contracts down into smaller lots.

“That way, it can spread its risk while also reaping the benefits that come from procuring a greater proportion of its work from a broad range of small companies.

“Construction SMEs train two-thirds of all apprentices and are a sure-fire way of spreading economic growth more evenly throughout the UK.”