Oral evidence: Carillion, HC 769

Oral evidence, 22 February 2018.

Witnesses

Lesley Titcomb, Nicola Parish and Mike Birch.

Chair

Welcome. Thank you very much. Lesley, might you introduce yourself and then your team?

Lesley Titcomb

Yes, of course. Good morning. I am Lesley Titcomb; I am the chief executive of the Pensions Regulator, where I have been since March 2015.

Nicola Parish

Good morning. I am Nicola Parish. I am the executive director of frontline regulation. I have been in that role just 18 months. Before that, I was director of case management and before that was leading the legal team at TPR.

Mike Birch

Good morning. I am Mike Birch; I am the director of case management at the regulator. I have been at the regulator for about six years and have been in that position for 18 months.

Lesley Titcomb

Mike and Nicola lead our frontline regulatory work on a day-to-day basis.

Heidi Allen

Good morning, everybody. I want to start by trying to get a bit of a picture as to your involvement with Carillion and specifically the trustees, I suppose. Just to set the scene a little, going back to a couple of old pieces of correspondence, as far back as March 2010, the then Carillion Chair of Trustees wrote to you expressing concern about the inability to reach a satisfactory conclusion, “would welcome assistance you could give” and notes that the recovery plan exceeds a 10‑year maximum. It expresses all sorts of concerns. Fast forward to 2013; we have all schemes writing collectively to you. An impasse has been reached; no further progress can be made without the intervention of the regulator. Talk to me about what you did.

Lesley Titcomb

I will just set some context here, and then Mike can talk about the detail of what happened then. What we are dealing with here is a framework set for us by Parliament, which has flexibility built into it. It means that an employer with a deficit in their scheme does not have to pay down that deficit immediately. The trustee, who is the first line of defence for the members, and the employer are required to come to an agreement on the appropriate level of funding for the scheme at that point in time, depending on the scheme’s specific circumstances. We as the regulator, usually working behind the scenes so support the trustee, have to balance the objectives of protecting the member benefits and the PPS by ensuring that the scheme is adequately funded but, at the same time, not doing that in a way that imperils the sustainable growth of the employer.

Heidi Allen

That is assuming there is sustainable growth of the employer.

Lesley Titcomb

Yes, but that is a fairly widely drawn term in terms of when that objective was given to us, as I understand it. It takes into account a range of circumstances but, most importantly, it is because the best protection for a defined benefit scheme is a strong and sustainable employer. Mike can talk about how that translates into what we did at the time.

Heidi Allen

What did you specifically do here? It sounds to me, to set the scene, that the trustees were asking for your help and saying, “We can do nothing further ourselves”.

Mike Birch

Our primary engagement was with respect to the 2011 valuation. We had some engagement from 2008, but it was less intense.

Heidi Allen

Despite them writing to you in 2010.

Mike Birch

We engaged with the trustees on the 2008 situation, including on the Carillion scheme. Our engagement became fuller in 2011. In 2011, we engaged in what is called proactive engagement. By that we mean engagement before the valuation has been agreed. Typically before that tranche of valuations, we were only engaging once the valuation had been agreed.

Heidi Allen

Talk to me about what engaging means.

Mike Birch

Engaging can be a wide range of things. In 2011, we contacted the trustees and we sought to discuss with them the position that the scheme was in. As Lesley has described, they are the first line of defence; they have the first engagement with the company. In this situation, the trustee was initially keen in 2011 and this was at the point when there was a single trustee for a number of the schemes. The trustee was keen to retain that primary locus with the employer and to seek to reach an agreement on an appropriate recovery plan. It became clear that that was not possible; they were not getting agreement from the employer.

Heidi Allen

Why did they write to you in April 2013 saying that, “The trustee has offered arbitration and mediation to the sponsor, but the offer has been refused. The trustee has now reached the position where it believes formal intervention by the Pensions Regulator is necessary”?

Mike Birch

That was the point at which we became more involved. We had sought to be involved earlier. They had said they would like to keep us informed.

Heidi Allen

What evidence can you give us of your attempts to do more then? It sounds like you are saying you wanted to do more with the trustees and they said, “We are fine”. What evidence do you have for that?

Lesley Titcomb

It is important to understand the context at that time. This was the first real period that TPR was using this approach of trying to intervene proactively. It was a new way of acting at the time. Some trustees were welcoming in some schemes; others were wanting to carry on.

Heidi Allen

Hence the evidence—what did you do?

Lesley Titcomb

That is why we engaged when they came to us.

Mike Birch

We had been engaged with the trustee. They had been keeping us informed of what was happening. It then got to a point when they decided that they could not reach an agreement, and wrote to us with what is called a formal failure to agree. At that point, we engaged directly with the employer. We had meetings with the employer and with the trustees. We got them to present to us the amounts of money that they thought they could pay and why they thought it was constricted. We disagreed with them on that and we sought revised proposals from them. They gave us revised proposals and we then said we thought those were not acceptable. We made clear to them that, if they did not reach something that was better, we would look to use our powers. The powers that we looked to use were two. The primary one is what is called Section 231. That is a power under which we can set the terms of a valuation and we can also set the recovery plan, so the amount of money that is going to go into the scheme. Prior to doing that, we would appoint what is called a skilled person to look at the business, understand the cash flows that it had and understand the ability to fund the scheme over a reasonable period. On the basis of that, we would then set the amounts in the recovery plan under Section 231.

Heidi Allen

Did you do that?

Mike Birch

No, we made clear to the company that we were considering that. They then gave us and the trustees an improved proposal, which saw the payments stepping up over time and more money going into the scheme. On that basis, we and the trustees agreed that what was offered in response to our threat of use of those powers was acceptable.

Chair

Heidi, can I just interrupt? Mike, can you tell us when the first cry for help was? Was there a timescale for your intervention? There was the pre‑period when they said to you, “Don’t you worry; we are going to deal with it”. When did they say, “Please help us”?

Mike Birch

They made that clear prior to the formal failure to agree, but I would have to check the record to give you a formal date of when they first said to us that they could not reach agreement.

Chair

Was this around 2011?

Lesley Titcomb

This is the 2011 valuation we are talking about, which was due to be submitted to us in 2013 and it was late. It is important to understand that discussions were going on all through this period.

Chair

Heidi’s questions are not about this, are they, Lesley? They are about when they said help and what you then did. From the answers you gave to Heidi, I thought you were saying 2011. Is that right?

Mike Birch

No, this was the 2011 valuation. This was 2013.

Chair

When did they shout, “Help”?

Lesley Titcomb

It was in 2013.

Mike Birch

In 2013, they wrote to us to say that they could not reach an agreement and there was a failure to agree.

Heidi Allen

The asking for help, I suppose, got stronger and stronger. They first formally document it in 2010, about the previous instances.

Lesley Titcomb

Indeed, when we go back to 2008, you are right, they also had similarly robust negotiations then, but that did not get to the point of the formal failure to agree.

Chair

Was that switching on your red light for you?

Lesley Titcomb

Yes, and that is one of the reasons that they were selected as a proactive case for the 2011 valuations. They were selected again and we continued the negotiations in the work through 2013.

Chair

They came out with their 2011 valuations in 2013. Could you have asked for it earlier? Is it normally like that, two years late?

Mike Birch

It is an end‑of‑2011 valuation, so the statutory time period for completion of that is 15 months, which would take you to March 2013.

Chair

Who is doing the valuation?

Mike Birch

The trustees were doing the valuation and their advisers.

Chair

Which company did they employ?

Mike Birch

I would need to check that.

Heidi Allen

I suppose what I find slightly curious about that 15‑month period is it seems to me that the first time when all three sides of the equation—the trustees, the company and yourselves—got together was in April 2013, when you stated that your role was as a mediator. That is beyond the 15‑month window, so the deadline had already passed and, at that stage, you are considering yourselves and describing yourselves as a mediator. At the same meeting, Robin Ellison quoted Richard Adam, who was the financial director at that time, as saying he considered the pension schemes were “a waste of money”. Did you agree?

Lesley Titcomb

I do not believe that workplace pension schemes are a waste of money.

Chair

Had you heard these terrible things?

Lesley Titcomb

I cannot say exactly what he said. I was not in the room at the time.

Mike Birch

I was not in the room at the time either, so I cannot say.

Chair

Was anybody in the room at the time?

Lesley Titcomb

None of the three of us were, no.

Chair

None of your side was there when this was said.

Mike Birch

None of us was directly involved.

Heidi Allen

As an organisation, did you share the trustees’ worry that the company was not taking it seriously?

Lesley Titcomb

Absolutely, yes.

Mike Birch

Yes. It is unusual for us to use Section 231 and it is also unusual for us to threaten it. We need to have significant concerns. We do not threaten it when we do not think we would use it, so we were concerned.

Heidi Allen

You threatened to use it in June 2013, July 2013, November 2013, November 2013 again and March 2014, but never actually did. I suppose it is just that wishy‑washy area of threatening, threatening, threatening—“Oh gosh, look. The company has gone belly‑up”. When do you use these powers?

Lesley Titcomb

There are some important issues to unpack here. First of all, Section 231 is a difficult power to use. We are seeking some improvements to it, as part of DWP’s work on its White Paper at the moment. Those cases that we launch take a long time when we do go through them. We have got as far as issuing warning notices in certain situations.

Chair

How many times have you used it then, Lesley?

Lesley Titcomb

We have got to the stage of issuing warning notices in three cases so far, I believe, but we have threatened the use of it more times than that. That has had the effect as it did here.

Chair

In how many cases have you threatened it?

Lesley Titcomb

It is quite difficult to say. We have 2,000 funding valuations each year.

Chair

Things might be complicated, but you must know whether you have threatened to use it or not.

Lesley Titcomb

If you think about the type of engagement we are having with the trustee and with the employer, then there is a range of interventions that we as the regulator can have. You have a regulatory toolkit available. Very often the mention of the possibility of using powers has the effect of bringing people to the table, which is, after all, the desired result if you then get more money into the scheme.

Chair

It is not just getting them to the table, is it? It is getting some money out of them.

Lesley Titcomb

Absolutely, yes, and that is what you are aiming for in terms of the outcome. It is important to say that, as well as the improvements to the powers that we are seeking in that regard, to give us a stronger evidential base and easier ability to use that power, we are also very much of the view that we need to be clearer and quicker. For example, you described us as a mediator in that context.

Heidi Allen

You described yourselves.

Lesley Titcomb

Yes, you quoted that we described ourselves as a mediator. It is absolutely essential that we are able to be clearer about our expectations, and I mean that both in the sense of our published guidance but also in terms of when we are talking to employers and schemes. We need to be clearer about what we expect, what is acceptable and what is not acceptable.

Heidi Allen

Is that not your job? Why is it a revelation that you now know you need to be clearer? Is that not the purpose of the Pensions Regulator?

Lesley Titcomb

I am sure that is how my predecessors felt it was. All I can do is observe from where I am now, with the situation that I have now.

Chair

You have been there years now.

Lesley Titcomb

We need to be clearer and quicker and tougher. We have changed already in that regard, we continue to change and we will change further.

Heidi Allen

If we could turn the clock back on Carillion, what would you as an organisation do differently?

Lesley Titcomb

We would have reached a decision to bring in our powers to bear quicker. We would not have continued so long in that negotiation situation and we would have tried to bring that to a conclusion quicker.

Heidi Allen

Would you have used your powers?

Lesley Titcomb

It is very difficult to say with hindsight, because I do not know the precise circumstances. As I have said, there are some issues with creating a strong case with the certainty of winning.

Heidi Allen

With the greatest of respect though, if you are trying to change the organisation and make it swifter and more responsive, is the way to do that not to learn from what went wrong?

Lesley Titcomb

I completely agree and that is exactly why we are here and why we have been reviewing what happened. These are my observations that I am sharing with you of the lessons we need to learn.

Chair

If we closed our eyes, we could be talking to you about BHS, so where is the learning going on here, Lesley?

Lesley Titcomb

The learning is going on, Mr Field, and the situation here is that we are talking about a circumstance that is earlier than some of the BHS material. Again, I am looking backwards with the benefit of hindsight to see what happened and what lessons we can learn from it.

Chair

You told us you were doing that on BHS.

Lesley Titcomb

Indeed, and we still are. We will have to do it with this situation as well, but that is why I am saying to you that we clearly have to be clearer, quicker and tougher in this regard.

Heidi Allen

I do understand shareholder jitters, being careful about exercising these powers and that fine balance. I do get that; I really do. Therefore, you probably cannot talk to us about any other cases where you may be learning and being more heavy‑handed. The difficulty is that, if no other organisation ever sees you applying those powers, is it not a question of Peter crying wolf? It is not surprising that the financial director did not take you seriously.

Lesley Titcomb

Yes, I agree with you totally. Therefore, I would point out to you that, over the past two years, we have made extensive use of a number of our powers for the first time.

Heidi Allen

Such as?

Lesley Titcomb

For example, there is the power to commission a Section 71 report to assess the affordability in a particular situation and the power to bring criminal prosecutions against people for non‑compliance with a Section 72 order.

Chair

Who was that against, Lesley?

Lesley Titcomb

That was against Dominic Chappell, but also against three other people in connection to cases relating to scams. We have been into the High Court and secured £13 million worth of awards using our Section 16 power to get restitution for people who have been scammed. It is very much an ongoing piece of work for us to use more of our powers, and this includes Section 231.

Chair

Mr Chappell and the others are all small fish, are they not?

Lesley Titcomb

They are. That is possibly true, but equally I believe that, if we are to increase our credibility as a regulator in this space, we have to start with the examples that are there for you to deal with at the time. I do not think we can afford to let people who we believe have committed criminal offences off the hook.

Chair

In terms of building credibility, the employers are offering something like £35 million. The pension scheme wanted £65 million. How did you help bridge that gap? What was your effectiveness?

Mike Birch

£63 million was the number that originally was in the Gazelle report that was prepared for the trustees. They revised that number down significantly and that was the basis on which the trustee was then looking for £35 million.

Chair

Who revised it down?

Mike Birch

It was Gazelle, over the period of engagement with the company.

Chair

What did the company do to their offer?

Mike Birch

The company’s offer was £33 million, stepping up.

Chair

Stepping up to what?

Mike Birch

It was stepping up to £42 million over time. In total, the extra payments that were built into the recovery plan that was agreed following the threat of 231 were £85 million more, but they were spread over amounts stepping up over time.

Chair

How many years was that?

Mike Birch

It was 15.

Heidi Allen

I wanted to bring it back to this case, rather than more generic questions about the powers that you choose or do not choose to use. When we think about the argy‑bargy between the trustees and the company—“We want more”, “No, you can’t have it”—do you think it was a fair relationship or that the trustees capitulated more?

Lesley Titcomb

The trustees did a very robust job here in defending the members’ interest. As Mr Ellison explained to you, they have the challenge where they have to achieve this balance between what is right for the members, but also ensuring that they do not imperil the growth of the company and take full account of the representations that the company makes to them. It is a challenging job for them and it is a challenging job for us to balance these things. It requires difficult judgments.

Heidi Allen

In looking at the two parties, who did more of the compromising and who was more obstinate?

Lesley Titcomb

That is rather difficult to say with hindsight.

Heidi Allen

Should you not be all over the detail of what happened, Lesley?

Lesley Titcomb

I believe we are in that, working with the trustees, there was £85 million put into the plan.

Chair

That is over 15 years.

Lesley Titcomb

It is over 15 years. That is right, yes, but that is the nature of recovery plans. You do not have to pay down the deficit immediately. The employer is permitted to do that over time. If I may set some context to what was happening at the time—

Chair

It was going belly‑up, was it not?

Lesley Titcomb

I am talking about the general environment, if I may, which was a strong focus on the growth of employers at the time and a perception, as I understand it from talking to people who were involved, that the regulator was being too hard on companies at the time. That actually resulted in us being given the sustainable growth objective as an additional objective on the face of the legislation. We were in a slightly different environment then. With hindsight, we would have wanted to have secured more into the scheme.

Chair

Will you give us a note on who was claiming you were being too tough, Lesley? Not now but can we have a written note?

Lesley Titcomb

I will look and see whether we have any particular examples of that. I am not sure whether we do.

Chair

I have not read any.

Chris Stephens

The deficit recovery plans were imposed on the trustees and they doubled in length between 2006 and 2013, so did the regulator believe at any stage that these plans had any chance of succeeding?

Mike Birch

It is important to put it in context in two ways. One is that the deficits grew significantly in that time. This was the time of the financial crisis. It was a time of reduced expectations for growth in assets and a lower interest rate environment. For all schemes, deficits grew significantly during that time. The length of the recovery plan for Carillion’s schemes was longer than the average, and the schemes were marginally worse funded than the average, but the other context of this was that, at the time, the company presented as being a reasonably strong business. We graded it as two—so what we call “tending to strong”—out of four. It was a company that had a growing share price. It was a company that was securing a lot of bank facilities. It was a company that was securing a lot of government contracts. It presented as a very strong company at that time. What is not clear—and we all know where it has ended unfortunately—is how much the seeds of that ultimate failure were present at the time. That is something that we are looking into with the FRC, the FCA and the Insolvency Service. At the time, we were not alone in thinking that this was a relatively strong and relatively stable business that had the opportunity to address its deficit, which had grown along with that of other schemes. We were giving it time to address it in a context where we expected the business to be surviving. We know now how it ended up, but it was not obvious to most observers, at the time that we were involved in the 2011 valuation, that it would end up where it has ended up.

Chris Stephens

Can we just get back to that? I am concerned that what I am reading in terms of the meeting notes between the trustees and the regulator is that it was not the case that the regulator had concerns in 2011. Is it not the case that, in the 2008 valuation, the regulator had had a number of concerns at that point and believed that a number of issues would have to be resolved in the 2011 valuation?

Mike Birch

That is true. In 2008, we were concerned by the amount of money going in. We were concerned about the balance between the trustee and the employer, in terms of their payments to the scheme. We agreed to the 2008 valuations on the basis of assurances from the trustees that they felt they could address that through the 2011 valuation, in getting more money. We had concerns in the 2011 valuation. I have presented that we saw this as broadly being a “tending to strong” business. That means that we had some concerns and we saw some strains in the business, but we did not see it as different from a large number of businesses at that time.

Chris Stephens

In a meeting note from a tripartite meeting between the trustees, the company and the regulator, it is the case that the regulator confirmed that their 2008 approach had been flexible and that a number of points would need to be addressed at the next valuation. What points were addressed at the 2011 valuation?

Mike Birch

That is true. At the 2011 valuation, we sought to increase the amount of money going into the scheme, and the amount of money going into the scheme was increased. Again, 2011 was a compromise in the context of seeing that as a business that had time to address the deficit.

Chris Stephens

The regulator then concluded in March 2014, “We continue to have concerns that the level of investment risk remains substantial”. That does not seem like a company that is strong.

Lesley Titcomb

The investment risk point relates to the investments of the pension scheme though.

Mike Birch

We got comfortable with or accepted the valuation and the recovery plan as presented, but we sought—and this was relatively unusual at the time—to continue to engage with both the company and the trustee to de‑risk the investments that the scheme took.

Chris Stephens

You signed off the 2008 valuation on the understanding that the 2011 valuation would add to further de‑risking of the schemes, only then to approve the 2011 valuation, which shows little evidence of de‑risking. Why was that the case?

Mike Birch

At that point we still saw that as a live issue and continued to engage with it.

Chris Stephens

Robin Ellison’s letter to this inquiry makes clear that Carillion’s refusal to pay a higher contribution is limited to the extent to which the trustees were able to de‑risk. There is a letter from the regulator to both the trustees and Carillion that says, “The debt recovery plan payments that the company was proposing is a range that we would not consider acceptable, based on the evidence we have seen”. Is that the case?

Mike Birch

Is that from the regulator saying that?

Chris Stephens

Yes.

Mike Birch

Is that prior to agreeing to it?

Chris Stephens

Yes.

Mike Birch

That would have been prior to them increasing their offer.

Chris Stephens

That was in March 2014, so why was the agreement not challenged then?

Mike Birch

I would need to look at our records in the context of that, but I would expect that was not in the context of the final offer that we accepted.

Chris Stephens

The last recovery plans were 16 years for the largest scheme. What proportion of the schemes you regulate have such plans?

Mike Birch

This is an outlier in terms of the length of the recovery plan. Are you talking about 2011?

Chris Stephens

I am talking about the fact that there is a 16‑year recovery plan. What I am trying to assess, in terms of the regulator and its work, is what proportion of pension schemes you look at that have a deficit recovery plan of 16 years.

Mike Birch

The reason I am querying the 16 years is because our records show that the 2013 valuation, and this is for the five schemes that make up the single trustee scheme, had a 12‑year period of paying into the scheme.

Chris Stephens

The largest scheme had a 16‑year recovery plan. That is my understanding.

Mike Birch

That is unusual. The average at that time was around eight to nine years.

Rachel Reeves

The question is about how many have recovery plans of 16 years, not what the average was.

Mike Birch

My point is I do not know how many. I cannot give you an exact number.

Rachel Reeves

This is quite an important point and you knew you were coming to give evidence to our Select Committees today. You know that one of our concerns and one of the concerns that Frank Field’s Committee has expressed previously is that recovery plans of more than 10 years just do not seem to us to be acceptable. We are asking you how many schemes that you are supposed to be regulating have recovery plans of more than 10 years and more perhaps than 16 years. What is the answer to that question?

Lesley Titcomb

The number changes constantly.

Rachel Reeves

What is the number at the moment, Lesley?

Lesley Titcomb

I cannot answer that question.

Rachel Reeves

Why not? Are you not on top of the detail of the schemes that you are regulating? You knew you were coming to give evidence to our Committees today. It seems that so far, in the half an hour that you have been answering questions, you have been asking us to clarify the questions and saying you have to go away and look for more details. You are giving evidence to a Select Committee. We are all busy people who have a lot to do with our time, and we feel today—or I feel certainly—that you are going to have to come back and answer these questions again, because you do not have the detail. Do you know how many schemes have recovery plans for longer than 10 years, a previous recommendation of Frank Field’s Select Committee?

Lesley Titcomb

I do not know precisely at this point in time.

Rachel Reeves

Do you know roughly?

Lesley Titcomb

We deal with just under 6,000 schemes. 2,000 have their triennial valuation each year. I cannot answer, off the top of my head now, how many precisely have a recovery plan of 16 years.

Rachel Reeves

Do you not think that that is a piece of information you should have had when you were giving evidence to our Select Committee today, Lesley?

Lesley Titcomb

There are many pieces of information I wish I could hold in my head.

Heidi Allen

With the greatest of respects, Lesley, something like that is a major KPI in your organisation. How many schemes are struggling and pushing their deficits down the river.

Chair

This is actually the red light, is it not?

Lesley Titcomb

If I may say so, the length of the recovery plan is one of the flexible elements of the framework that I described to you earlier.

Heidi Allen

You call it a red warning light; you call it flexible. That just sums it up really, does it not?

Lesley Titcomb

The increase in a recovery plan is not in itself a signal of a scheme in difficulty. It is one of the elements that the trustees and the employer can flex in coming to the right funding solution for a scheme, at a particular point.

Rachel Reeves

Did Carillion have the right flexibilities? Did it have the right recovery plan to close that deficit?

Lesley Titcomb

As we explained to you, we felt it was a reasonable judgment for the trustees to have come to at the time. It is noticeable, for example, at the time of the 2013 valuation that the deficit had substantially reduced on the six schemes. The deficit was therefore expected to be paid off in 12 years.

Chair

We have had you before us twice recently. One was BHS; one is Carillion. Both of them had this extraordinary length of time for repayment, and you still cannot answer Chris’s and Rachel’s questions. How many schemes are in a similar position? Both of them promised you big recovery payments but paid nothing upfront. You talked earlier on about how you negotiated £81 million extra. In the first two years, you got nothing extra, did you? It was £30 million‑odd and they continued to pay that, and then they went belly‑up.

Lesley Titcomb

It was £85 million, but you are absolutely right about the profile of the extra recovery money.

Chair

They just agreed that with you and kicked the can down the road.

Lesley Titcomb

It is very easy to say that with hindsight, but the fact is that, as I said, negotiating a recovery plan that balances the interests of the members with also the ability of the organisation to address its other obligations and to deal with its commercial priorities is a key part of this. It results in these difficult decisions and, sometimes, a longer recovery plan is appropriate.

Chair

You cannot even answer Rachel’s questions. How many other schemes are in this position? How many other schemes were coming before you pleading poverty—“We need all these extra years”—but were paying dividends? How many were in that position, Lesley? Could you tell us that?

Lesley Titcomb

I cannot answer that question either. These are complicated numbers that change constantly over a period of time. I would be happy to send the Committee a note on how many schemes are in that situation at present.

Chair

That should be your daily diet, should it not? Every week you should meet your staff and say, “Here are those that are most vulnerable, still paying huge dividends. What action are we taking?”

Lesley Titcomb

I can assure you that we take forward the sorts of issues you have identified there with our very committed staff down in Brighton.

Chair

We do not doubt the staff’s commitment. We doubt your action.

Lesley Titcomb

We have to take these things forward, as I have said, according first of all to the number of schemes that we can engage with according to the level of resources we have, and clearly—

Chair

How are you engaging with them, Lesley?

Lesley Titcomb

Nicola can talk about how many we are engaging with at any particular time.

Chair

You do not know the answer, Lesley.

Lesley Titcomb

I do not, off the top of my head. I am going to ask Nicola to answer this, because of the fact that my remit covers not only defined benefit schemes but also defined contribution schemes, public sector schemes and so on.

Rachel Reeves

It is not like we have just bumped into you.

Andrew Bowie

Is there a list of pension schemes?

Lesley Titcomb

No, there is no public register of pension schemes.

Chair

You have a register, do you not?

Lesley Titcomb

We have a list, absolutely. We have our list.

Andrew Bowie

It would not have been beyond the realms of possibility to have that with you today, in terms of the ones you are worried about.

Lesley Titcomb

It is not indeed. There are 6,000 schemes. We have a range of tools that we use to monitor them and our principal way of doing that, as Nicola will explain, is through the case work that we do on funding, but there are a number of other engagements. We are also changing our approach to this, so that, for some of these higher‑risk schemes, we expect to be engaging and dealing with them not just around the three‑year valuation point, but on an ongoing basis, so that we can monitor further developments in support of the trustees on those bigger schemes and so on, but that is a new approach that we are moving to.

Chair

Lesley, if Rachel and I bumped into you at a bus stop, we would expect you to be better informed than you are now.

Lesley Titcomb

I can only apologise if you feel that I do not have the information available, but there is a great deal of it. It is complex and I cannot hold it all in my head.

Chair

Are you saying that there are so many ones in near-crisis that you cannot have a list of them?

Lesley Titcomb

No, I am saying that there are 6,000 DB schemes that we look after, plus all the DC and public sector ones, and I cannot hold every single number in my head.

Rachel Reeves

Lesley, nobody is asking you to keep every single number in your head. You know the previous recommendations of this Select Committee about the timeframe to close deficits. You know the concerns that we have around Carillion, around the 16‑year timetable for closing that deficit. We are not asking you how many schemes in the DC area you have concerns about or some obscure company that no one has ever heard of. We are asking you about things that are pertinent to the issues we are discussing today. There are lots of people who are saving for pensions today, but not enough people saving for pensions today. One of the reasons why people do not save for the future is that they are worried, if they pay in money in their 20s or 30s, whether it will be there when they are in their 60s. They look in the end to people like the three of you, but particularly you, Lesley Titcomb, to ensure that their schemes are properly funded, so they can rely on that money on their retirement. I expect there are a lot of people who will feel they are right to doubt the ability of the money that they save today to deliver for the future, if the custodians of that and the regulators of that, which is what you are and what you are paid to do, are not on top of the detail. Frank Field is absolutely right. There should just be, I assume, a few schemes that have 16‑year payment plans, in which case I would expect you not just to be able to tell us the number but to name them. The fact that you cannot do that sends huge shock waves of red alert, as Heidi Allen and Chris Stephens have said, that you are not on top of the detail at all.

Lesley Titcomb

I wish to make clear, please, that we are very much on top of the detail.

Rachel Reeves

You are not.

Lesley Titcomb

At the regulator, we work very hard to take into account a number of indicators about a scheme’s situation.

Chair

I do not doubt any of that.

Lesley Titcomb

The recovery plan is one; it is an important one, but it is not the only one.

Rachel Reeves

It is not one that you can tell us about.

Antoinette Sandbach

Do you have a red/amber/green system? How many are in the red zone?

Lesley Titcomb

There are various ways that we classify schemes. Mr Birch has indicated one, which is the covenant strength of the employer, which is where we grade the employer out of four.

Antoinette Sandbach

My question is really, out of the 6,000, how many are in the red.

Mike Birch

We engage with about 200 out of the 2,000 schemes each year that have valuations. That is for a variety of reasons but, principally and fundamentally, it boils down to us being uncomfortable with the length of the recovery plan, the amount of money that is going in, the covenant grade and the long‑term viability. Not all of those will have recovery plans of the length you are talking about.

Chair

Antoinette’s point was different. She did not want to know how many you engage with because they are having a revaluation. I chair a very small mutual, and we have these red lights at every meeting on every aspect of our business. Antoinette has asked you how many are in the red, amber and green categories of the thousands you are looking after.

Lesley Titcomb

As is widely known, the majority of those 6,000 DB schemes, so we are talking over 5,500, are in deficit or were at the last point that there was a valuation performed.

Chair

We are not asking that question. Antoinette asked a different question. She asked, so you are focused on them, how many have a red mark against them. How many of the schemes that you are a policeman for have that now?

Mike Birch

There are roughly 200 a year we engage with. That will be for a number of reasons. It may be because their valuation comes up. It may be because we see that there is a takeover happening. It may be because we see profit warnings. Broadly those would be in the red zone.

Chair

This is not the question that Antoinette asked you. You may engage with that number. Antoinette asked a very simple question: how many of the schemes for which you have stewardship or duty of care do you have a red mark against? Never mind how many you engage with. How many have flashing lights, as Antoinette asked?

Mike Birch

We do not formally classify schemes into red, amber and green in the way that you have described. We assess all valuations that we get each year and decide whether they meet our risk criteria. That is based on the strength of the covenant, the level of the funding and whether we think it is appropriate to seek to change the valuation. We engage with some of those before, because we have assessed them on the same metrics. Those will be the larger schemes we engage with to try to address the valuation before it is agreed, and then we have others that we engage with because we have concerns, because they are subject to a takeover or they have profit warnings. We find those though a variety of means. There are a number of different ways that we scan the horizon to find those schemes, and we are looking to increase that in what Lesley describes as TPR Future, so our new approach to addressing schemes. We will increase the focus on proactively scanning the horizon for situations which are showing corporate distress.

Chair

Antoinette, I do not understand the answer, but do you? Are you happy with that?

Nicola Parish

Would it help to say, in terms of how many are in the red, it will not be more than 200, because of the way Mike has described how it works? Within those 200, there will be some red and some other colour as well. It is just that we do not classify them in the way in which you have classified them. They are the ones that we are focusing on every year. We will be focusing on that sort of number.

Antoinette Sandbach

I understand that that is what you are focusing on, but Lesley’s evidence was that 5,500 out of the 6,000 were in deficit.

Nicola Parish

Yes, that is absolutely right. Of course, the way the regulatory framework is set up enables employers to pay that deficit off over a period of time. There are 5,500 in deficit at any one time, and our role is to ensure that an appropriate plan is put in place for the payment of that deficit.

Antoinette Sandbach

Where, like Carillion, you have very high dividends being paid out and high pension deficits, do you flag up those schemes and go in to protect the interests of not only the pensioners but the taxpayer who has to pick up the tab when you have failed to do your job properly?

Nicola Parish

The issue of the amount of dividends is certainly something that is taken into account when considering whether it is an appropriate recovery plan. That is absolutely right.

Chair

They were paying these mega‑dividends. You negotiated a new scheme. In the first two years, they paid hardly a penny extra, did they?

Nicola Parish

It is all about getting that balance right.

Chair

It is, precisely.

Nicola Parish

Exactly, so we worked on the basis of the audited published accounts, which told us the strength of the employer. The strength of the employer is a relevant factor in relation to when it is paying out dividends.

Chair

They were pretending they were very strong.

Nicola Parish

We now know that with hindsight.

Chair

The problem is, because they were presenting themselves as very strong, it gave you a strong basis to ask for more money now, not that you were looking into the future, thinking, “God, this company is going to collapse. We had better be careful with them”.

Nicola Parish

One way in which the regulatory framework operates, which is interesting, is that the stronger an employer is the more they can withstand risk in their investment strategy.

Chair

They could pay you more and you did not get more money from them.

Nicola Parish

They are more able to support the risk in a pension scheme. Therefore, it does not always follow that, although they may be able to pay more money, they have to pay more money under the regulatory framework. That is where this balance comes into play.

Chair

There was no balance at all.

Chris Stephens

We will come back to the evidence later. I am quoting the regulator’s own code of practice: “A longer recovery plan period may be appropriate where technical provisions reflect a particularly low risk approach”. The trustees were telling the regulator that Carillion was asking the trustee to ensure no de-risking of its assets, so how is that approach consistent with your own guidance on long deficit recovery plans, compared to the low level of contributions that Carillion was setting out?

Mike Birch

Their approach to setting their valuation terms was not particularly low-risk. It was marginally worse than normal in terms of the discount rate that they used to set that and, therefore, that was the reason that we sought to improve things. The level at which we agreed, with hindsight, is something that, if we had known then what we know now, we would have sought more.

Chris Stephens

It seems to be against your own code of practice. The code of practice of the regulator is giving advice to companies. If companies are ignoring that code of practice, why are you not using your powers?

Mike Birch

That was why we threatened to use our powers.

Chris Stephens

You threatened to use them but you did not use them.

Mike Birch

We did not use them.

Lesley Titcomb

The outcome we are trying to achieve here is a good one for the scheme. We will use whatever tools are available to us in our armoury. When we threatened to use our powers that had an effect on what the company was doing.

Chair

It did not at all. They hardly paid a penny more. It had no effect.

Lesley Titcomb

I maintain that they did.

Chair

They promised you candy floss in the future.

Lesley Titcomb

On the basis of what the situation was at the time, the trustee was content to accept that offer.

Chair

Ah, so it is the trustee now.

Lesley Titcomb

No, we supported that. I absolutely agree we supported that. With hindsight, as Mike has said, we would take a different view now.

Chris Stephens

Given the purported health of the company, they are saying to the public that everything is fine, but for pension trustees it is not. Why was that not worthy of intervention?

Mike Birch

We did intervene in terms of being engaged with the company. We did intervene in terms of threatening to use our powers. As you say, we agreed to something that, in the end, has not resulted in significantly more cash going into the scheme, given when the company failed. It is something that we are learning from. It is something that the business presented as being strong. It was in what we call our grade two, so not without risk but a good company. One of the areas on which we are putting much more focus and where we are trying to seek improved powers is in addressing what I would call unnecessary risk. In the context of this situation, this presented as a good company. If we had pushed for more money in a way that was effective that would have been a good thing. We are looking now for improved powers to use our Section 231 power more effectively.

Chair

You did not use the powers you had though, did you?

Lesley Titcomb

No, and one of the reasons, as I understand it, as to why that was is the challenge with these words in Section 231. It is particularly the fact that we have to demonstrate that what is being offered is not prudent or is inappropriate.

Heidi Allen

You can see the dividends that have been paid out. It is very clear. Anybody can go on to Companies House and see the dividends. That should have been an absolute warning light.

Lesley Titcomb

Indeed, but the fact is that we then have to demonstrate that it is actively not prudent, not inappropriate and it is also reasonable for us to take action.

Chair

You did not have to do any of this, Lesley. When they came before us they came like peacocks into the room. They staggered in looking around, thinking they were going to be admired. They were in Noddy land, clearly. They could not understand why these mega‑dividends had all stopped and all the rest of it. When you were negotiating with them, they were boasting of these mega‑dividends. Why the hell did you not use your powers? They were shovelling money out to themselves; they were shovelling it out to shareholders. Why did you not get them to shovel it the pensioners’ way? None of you was at the meeting, though you were the senior people, when one of the senior people on the other side said he thought pensions were rubbish.

Lesley Titcomb

It is very important to say that regulating in these circumstances is not just about using the enforcement powers.

Chair

It is about being effective.

Lesley Titcomb

Very often the threat of using those powers brings people to the table. Difficult judgments were made at the time, in terms of that revised offer that you have described, which was made by the employer, and the decision was taken to accept it. Given all that we know now and as Mr Ellison said himself, whether we would have accepted that at the time knowing what we know now is of course debateable, but the fact is that it had to take into account a variety of things. That was done and the revised offer was achieved.

Chris Stephens

That is our concern. What this inquiry needs to try to establish is how many other Carillions there are out there with schemes like that. How many schemes are you threatening to use your Section 231 powers on at the moment?

Mike Birch

We have had two situations in the past, one where we have issued a warning notice and one where we were close to issuing a warning notice, where there was settlement at the level that we wanted. We currently have three cases that are live—one where we have issued a warning issue and two others where we have skilled persons who are helping us build our case.

Chair

This is out of your list of 200.

Mike Birch

Yes, we have others in there that we are close to starting that formal process on as well.

Chair

We do not want the names of the companies—I can see that—but would you give us a list of the 200 and actions that you are taking? You think these are the companies that are vulnerable, and we would love to see how your threats of use of action are bringing them all to the table.

Lesley Titcomb

We are constrained to a degree on what information we can give you.

Chair

No, I am asking you for that information. I do not want the names of them; I want from one to 200 and then the details about the scheme and the action you are taking.

Lesley Titcomb

That would be our particular case load at any point in time.

Chair

It is just the now one.

Lesley Titcomb

We can certainly give you some descriptions of what is in there in relation to funding the cases—

Chair

We want 200.

Andrew Bowie

Good morning. We know that Carillion was heavily dependent on purchasing other companies for its growth and that some of these companies already had significant DB pension scheme deficits. McAlpine, as we know, was purchased in February 2008 and had a deficit of £110 million in its pension scheme, which was eight times more than Carillion’s at the time. By the end of 2008, Carillion’s pension deficit had risen by 348%. The Chairman of the McAlpine scheme is a Robin Ellison, and he has told us of his concerns. He said, “The challenge we were facing was: was Carillion a worse covenant than McAlpine? It was difficult to balance. First of all, we did not have a veto anyway, but on calculation of the covenant the margins that Carillion was making were so small compared to McAlpine’s that it was a real worry for us”. Did the Pensions Regulator share the concerns of Mr Ellison?

Lesley Titcomb

It is fair to say that, in these circumstances where there is a takeover, the thing we are always looking at is whether or not the covenant for the schemes that are affected by that takeover—so that will be both the acquiring and the acquired companies in this case—is going to add to or detract from the strength of the covenant.

Chair

Lesley, that is not Andrew’s question. Andrew asked you what you were doing in this case. What were you doing?

Andrew Bowie

It is quite obvious there was a problem.

Mike Birch

This case was one where they did not, I believe, come for clearance. We do not have a power to stop takeovers. We do not have that power. We do have a power retrospectively to act where the effect of a transaction is materially detrimental to the covenant of the scheme.

Chair

This is not Andrew’s question. Andrew’s question asked you about a specific point in the history of this firm, which further destabilised it, so what is your answer to Andrew’s question?

Andrew Bowie

It destabilised it over nearly a decade. It was quite clear that, every year, the situation got worse because of the acquisitions that they had made, so you must have shared the concerns that others were publicly saying they had at the time.

Lesley Titcomb

That is absolutely right and that reflected the fact that we were engaging.

Andrew Bowie

Did anything happen as a result of that engagement?

Lesley Titcomb

We were regulating the individual schemes before they then became part of Carillion. You then have to start looking at the position of those schemes together. Obviously they then also appointed a single trustee, so you start looking at them much more in the round then.

Chair

That is not Andrew’s question. What did you do?

Nicola Parish

How it feeds into the system is, when a business acquires another business, the acquirer will have a review of their covenant when it comes through to the triennial valuation. If in acquiring that business it has weakened the overall covenant that will then be reflected in how we view the proposals for repairing the deficit, going forward.

Lesley Titcomb

That would have meant, in this particular case, that would have been taken into account in the discussions that the trustees and we were having with the employers on the 2008 valuations, in terms of the acquisitions that happened then, and then in the period after 2008.

Andrew Bowie

You did not actually do anything. Despite everything that you were seeing on the ground and the concerns that were being raised by various different people, the Pensions Regulator decided not to do anything.

Mike Birch

We did not seek to use our contribution notice powers on the basis of it being materially detrimental to the scheme. We do not have the power to stop the transaction. We then sought to regulate the scheme as a normal scheme within that business that had acquired it. We did not take action to stop the transaction or to seek specific extra payments into the scheme at that time.

Chair

In answer to Antoinette’s question, was it already part of the top 200 you were looking at? Does Andrew’s question suggest you then put a red light, as we like to think of it, on this company or not?

Andrew Bowie

Was a red light put on that when this takeover happened in 2008?

Mike Birch

We do not flag them in that way. We engage with them. We have engaged.

Chair

Were they part of your 200?

Mike Birch

They were part of the 200 or so that we engage with each year in the 2011 valuation, as part of the five schemes. They were one of the five schemes.

Andrew Bowie

If you had the power to block acquisitions, would you have done so in this case, and not just in the McAlpine case, which was the biggest one, but the Mowlem case as well?

Lesley Titcomb

I find it difficult to answer that question with hindsight, because we do not know.

Andrew Bowie

It is a recommendation in the Work and Pensions report on DB pension schemes. If you did end up getting that power, would you use it if a company the size of Carillion acquired a company the size of McAlpine with a pension deficit the size it was at the time?

Lesley Titcomb

We would not in itself, no. As the law stands at the minute, if that were to be translated into a company coming to us for clearance, we would have to satisfy ourselves as to whether or not there was material detriment and then, if there is material detriment, whether or not there is any mitigation being provided, for example in the form of additional payments into the scheme or the ability to take security.

Chair

There were not. There was a bigger deficit locally and no additional payments. You did not act.

Lesley Titcomb

I think we have explained what we were doing at the time. We did not act in the particular circumstances of the acquisitions. We were taking account of the deficits within the funding discussions that were happening around the subsequent valuations.

Andrew Bowie

You said that you would not have acted even if you had the power to act.

Lesley Titcomb

No, I am not saying that. I am saying I cannot answer the question definitely, because I do not know the precise circumstances at the time. We would have had to consider, for example, if we felt there was material detriment and whether or not there was mitigation available for that. That is the type of situation you are faced with there.

Chair

Given the example that Andrew has given you, where the schemes are clearly weakened by this acquisition, I do not see why you find it so difficult to answer. Either with the wonderful business of hindsight we were wrong or we did not use our powers.

Lesley Titcomb

If we see evidence now of takeover situations where there is detriment to the scheme, then we indicate that we will open an investigation and see if we should use our powers, absolutely.

Andrew Bowie

If you had the power to stop those, would you use them?

Lesley Titcomb

That would be the sanction that we would have to consider.

Andrew Bowie

All the evidence that we have heard so far is that you do not even use the powers that you have.

Lesley Titcomb

We have to consider whether, for example, in that situation, if we said, “We are launching an investigation here”, there may be material detriment. This happens frequently in mergers and takeovers.

Chair

How many times have you used that emergency power?

Lesley Titcomb

We have used the anti‑avoidance powers about 27 times over the life of the regulator, for various reasons.

Chair

How many years is that, Lesley?

Lesley Titcomb

That is since 2005, Chairman. What we would do there is say, “We think this is a situation where there is detriment to the scheme. What mitigation are you going to give for that?” Sometimes they come up with; sometimes they do not and we continue with the action. There are a number of those that we are pursuing. One is in the Upper Tribunal at the moment, for example.

Andrew Bowie

Moving on, two weeks ago Keith Cochrane, the interim chief executive of Carillion at the time, confirmed that Carillion began to explore the option of a regulated apportionment arrangement in October 2017. It took until December 2017 for Slaughter and May to advise Carillion that one of the key recommendations of the regulated apportionment arrangement was that a company be inevitably insolvent within 12 months. Why do you think it was that an RAA was not sought before this?

Mike Birch

We put very stringent guidance around the situations where an RAA can happen, and the reason for that is that an RAA is a mechanism to separate the scheme from the employer. It therefore improves the position of the employer and it worsens the position for the members of the scheme, who generally end up in the PPF, so we are very resistant to those happening unless they absolutely need to happen.

Andrew Bowie

By this stage it was quite clear that an RAA was—

Mike Birch

We had had discussions, not directly with Keith Cochrane but with other members of management.

Chair

How low down were they?

Mike Birch

They were with Emma and also with Lee Watson, who is from EY, who was their senior restructuring officer.

Chair

It was not the chairman.

Mike Birch

I do not believe it was with the chairman, no.

Chair

Even though it was crucial.

Mike Birch

Our discussions were focused on identifying whether they thought that a regulated apportionment arrangement would be likely and to make sure that, if they did think that, they knew what the terms were. For most of that time, they maintained that it was very unlikely and the reason for that is that we insist that all other creditors get treated equitably in the context of what would happen to them in an insolvency. Actually, the pension schemes were closer to the assets. They were in the companies where the assets sat, whereas the banks were at the top of the business in the holding company. Therefore, for an RAA to happen the banks would need to be fully equitised and the company maintained that that was unlikely to be something that they would be bringing forward. As the situation deteriorated further and as it became clear that they were likely to need to equitise most of the banks anyway, they engaged with us very late on, in January. They put to us what was a high‑level letter setting out a principled approach to what they would look to do. It clearly did not meet all of our criteria, principally because it was from a situation that was not funded. For us to do an RAA, it has to be clear that it creates a better position. They did not have the funding to do that.

Andrew Bowie

Just to be clear, you wait for them to engage with you.

Mike Birch

Yes, we do not encourage people to do RAAs, because they are generally bad for members.