Merryn Somerset Webb
The collapse of construction and support-services group Carillion has left a lot of people with a lot of explaining to do. First up, the UK’s equity analysts. Even in 2015, says the Financial Times, two-thirds rated Carillion’s shares a buy – despite warning signs in its accounts. The managers are also in the firing line. Why on earth were they taking huge bonuses in the face of a failure they surely saw coming? Why did they take on so much debt (if there is one lesson for investors here, it is to avoid companies with high levels of debt)? And why did they keep paying dividends, even as their cash-flow woes mounted?
The UK’s institutional shareholders are hardly blameless either. They bore on endlessly about how they take a long-term view – so why were they demanding those dividends from a firm that was clearly stressed? Short-termism at its worst (see our cover story for more on firms who pay dividends that they probably shouldn’t). Next there is the civil service (and hence the government) – awarding major contracts to firms you know might not be able to deliver is embarrassingly irresponsible. So to whom should all of these people be explaining themselves?
There is the taxpayer: equity and bondholders will take the first financial hit, but the taxpayer will be next: all the contracts will have to be re-tendered and interim arrangements made while the bids come in – and that’s before we get the bill for the inevitable inquiries. There are the small subcontractors who may find the administration and cash-flow crunch of Carillion’s bankruptcy leads to their own. And the workers – some will lose jobs; all will have sleepless nights.
Finally, there are the pensioners. The Pension Protection Fund (PPF), which takes on the schemes of bankrupt firms, reckons it will cost around £900m to look after members of Carillion’s various schemes, even though they will pay current pensioners lower cost-of-living increases than they have been used to, and slash the eventual payments of those who aren’t yet retired. But Carillion’s pensioners aren’t the only victims.
The PPF works like a reverse tontine: it is financed by a levy on all other defined-benefit schemes. The more that fail and have to be taken on by the PPF, the more the survivors have to pay – which can only make them a little more vulnerable themselves (the PPF levy for next year is currently £550m – it will now surely rise). None of this will make the firms that finance those remaining schemes feel confident: with not just your own pension scheme hanging around your neck but everyone else’s too, why would you raise wages or invest heavily in the future? That’s not a dynamic that is good for any of us. My point is simple, and it is one I have made many times before: too many institutional shareholders and too many boards act as if their behaviour only affects them. It isn’t so.