A plan to injected hundreds of millions of pounds into the Carillion pension schemes before the company collapsed was rejected by the board of directors because they believed a restructure was still possible.
This plan was presented to the contractor by accounting firm EY in December 2017, but rejected by directors, according to documents released today (2 March) by two government committees.
After unsuccessful talks with its lenders and the UK government, Carillion, one of the government's biggest contractors, went into liquidation in January.
As a results, Carillion's DB pension schemes are all either in the retirement fund of last resort, the Pension Protection Fund (PPF), or will soon enter it.
The company has 13 final salary schemes in the UK with more than 28,500 members, and a deficit of £587m at the end of July.
Carillion, which employs about 43,000 people, had been struggling for several months, issuing a profit warning last year that sank its share price – which has fallen from more than £2 a year ago to about 14.2p just before it went into administration.
From the end of October, EY was producing weekly cashflow forecasts, which, by mid-December, showed that the company would have no “headroom” left by March 2018 and would therefore effectively become insolvent, MPs from the Work and Pensions and the Business, Energy and Industrial Strategy committees said.
The accounting firm produced modelling showing how Carillion’s assets would be realised in two scenarios: on an enhanced break-up basis, in which it would sell off profitable parts of the business and then entering liquidation, and on an unplanned insolvency.
Results showed that on an unplanned insolvency, EY estimated just £49.6m would be recovered, with the pension schemes getting just £12.6m.
By contrast, insolvency on a break-up basis would have secured £364.4m, with the pension schemes getting £218.4m.
Carillion board dismissed a break-up as not practical, instead choosing to believe they could successfully restructure, the MPs said.
After Carillion applied for liquidation, on 15 January, EY was approached to manage the administration but refused, as the firm did not believe there were sufficient assets left in the business to recover the costs of administration.
The Official Receiver appointed PwC as Special Managers, in place of administrators.
Estimated costs of administration so far are £50m, which will be paid out of public funds, MPs said.
According to Labour MP Frank Field, chair of the Work and Pensions committee, today’s documents reveal that Carillion had “a wholly deficient corporate culture, studded with low-quality management more interested in meeting targets than obeying rules”.
He said: “They reveal also pervasive institutional failings of the kind that don’t appear overnight, long term failings that management must have been well aware of.
“Time and again they ignored and overrode the millions pounds of advice they paid for, while stiffing the suppliers trying to deliver the goods that might actually have saved the company.
“Instead, they ran it into the ground. This left unsecured creditors like the pensioners and suppliers high and dry. Would you lend money to Carillion on an unsecured basis? They had no choice.”
Last week, it was revealed that Carillion’s former finance director Richard Adams thought funding the company's DB schemes was a "waste of money".
Earlier this week, it was disclosed that Carillion's former finance director tried to expose accounting irregularities at the now collapsed company almost three months before the full scale of its problems were made public.
MPs will continue their inquiry into the contractor collapse next week on Wednesday (7 February), with a hearing with representatives from institutional investors in Carillion, such as Kiltearn Partners, Aberdeen Standard Investments and BlackRock.
maria.espadinha@ft.com
