Tuesday, 16 January 2018

Getting to Know the Pension Protection Fund

The last post of Financial Regulation Matters looked at the then-ongoing crisis at Carillion; now we know that the firm could not survive the crisis, with the situation being that an official receiver was appointed to liquidate the company immediately. Whilst this author is not of the habit of agreeing with Andrew Adonis, his recent likening of the situation to the Enron scandal, in terms of the extent of the scandal and who it will ensnare as it develops, seems to be an accurate depiction; our old friends KPMG are currently being scrutinised for providing positive audits just months before the firm spectacularly collapsed – no doubt, many financial (and political) players will be implicated as this remarkable corporate collapse continues to come to light. However, whilst Carillion and the collapse will be revisited in this blog and, no doubt, fill the business media for weeks to come, this post will take a different approach and use the story to better understand a different type of organisation – the Pension Protection Fund (PPF).

In the Financial Times yesterday, a headline read ‘Carillion pension schemes transfer to industry lifeboat’, which the ensuing story confirming that ‘around 28,000 members of Carillion’s 13 UK Pension schemes will now be transferred to the Pension Protection Fund… Pension scheme members… will receive 90 per cent of the pension they were expecting, up to a cap’; in February 2017, the same assistance was offered to pension holders at the collapsed High-Street store BHS. The PPF is therefore (a) an important component in the financial landscape in the U.K., and (b) may see its importance grow as other firms flirt with collapse like Carillion has been; so, assessing its composition, aims and objectives, and place within the overall framework will be a useful endeavour. Born out of the Pensions Act 2004, the PPF was established in April of 2005, with its stated mission now being to ‘provide compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of compensation’. To fund this endeavour, the PPF has several defined sources of income, including an annual levy paid by all eligible pension schemes, recovery of money and assets, and returns on investment. In terms of its composition, the PPF is run by a Board, which is responsible for paying compensation, calculating levies, and setting investment strategies and include figures such as Arnold Wagner (Chairman) and Alan Rubenstein (CEO). Now that we know a little bit about the Fund, looking at how it operates provides a useful foundation to ask further questions, with the first point to note being that having this protection, from one specific viewpoint, is an extremely positive development. When we look at how the Fund managed the BHS situation, whereby the owners (and past owners) had pilfered the pension pot of that once-illustrious company, we can see that the Fund is very keen to promote the perceived independence of the initiative, with them consistently declaring to what-would-be worried BHS pension holders that they have been transferred into a scheme which is both very fair to them in terms of what they will be entitled to, and that the scheme has absolutely nothing to do with the firm’s previous management – ‘It will have independent governance and neither Sir Philip Green nor the Arcadia group will be involved in the management of the scheme’ is a definitive and revealing statement. Yet, the situation with Carillion, at the moment at least, is raising a whole host of questions about the Fund and its capabilities.

Whilst the figures being quoted for the impact that the PPF will have to absorb from Carillion’s collapse vary, they are all substantial. The Economist predict that the total impact could be close to £900 million, whilst other outlets predict between £587 and £800 million. According to the PPF’s last annual report, the Fund is operating with a reserve of just over £6 billion which means that whilst the Carillion hit will certainly not critically damage the Fund – meaning that headlines like ‘will pensions still be paid’ are slightly misleading – a minimum impact of £587 million is not insignificant, as the chances of clawing back some income from the Carillion rubble seem to be more remote by the day; the PPF was particularly reluctant to engage with the salvaging efforts of Carillion (its suggestion of transferring debt into shares would have made the PPF a major shareholder in the firm) which is looking to be a particularly astute call. However, whilst it is positive news that Carillion’s pension holders have this safety net to rely on, the situation raises another, more systemic question.

When a company fails, one of the biggest issues for its management is the pension pot – the reason for this, in one particular sense at least, is that the backlash will be amplified if the pension pot is drained in addition to the funds of the company, because shareholders are categorised, in the general public’s perceived persona at least, to be accepting of the risk of loss whereas pension holders are considered to be innocent victims in the arrangement; this was clearly demonstrated in the overly-public rebuking of Sir Philip Green’s treatment of the BHS Pension Pot. Yet, if we were to flip the focus, what does the PPF mean to corporate management? Whilst it means safety to pension holders, it means another layer of safety net with which directors can take greater risks for short-term rewards; today it was stated in the media that ‘the Government has ordered a fast-track investigation into directors at the failed construction firm Carillion’ but the chances of that culminating in anything more than a sacrificial lamb being offered up are extremely remote (the Government’s own complicity will no doubt be left out of that investigation). So, we know that an extra layer of protection will likely result in increased negligence from corporate management (Carillion being the case in point), and we have discussed on many occasions that the only real antidote is to alter the perception of what ‘crime’ is so that corporate crime is punished just like ‘conventional’ crime – the chances of risk taking would be instantly reduced. Nevertheless, it is difficult not be conflicted when assessing the PPF, because it is extraordinarily important as pension holders, who are often disproportionately incentivised to contribute to corporate schemes by way of corporate and governmental inducements, should not face having to lose everything because of corporate negligence. Yet, the extra layer of protection adds to other layers which make it extremely easy, particularly when paired to a lax punitive system for corporate crime, to commit corporate transgressions – now the moral dilemma of destroying pensions has been, effectively, removed in most scenarios (there are not many pension schemes which could deplete the PPF’s reserves single-handedly). The cyclical notion of that understanding results in the realisation that until corporate crime is properly designated as crime, very little will change.


Keywords – Carillion, Pension Protection Fund, Politics, Business, Corporate Crime, BHS, @finregmatters.

Thursday, 11 January 2018

Carillion Continues to Struggle – A Bail-out Test for the British Government

In November we discussed the impending crisis at Carillion, the large-scale construction business that has become intertwined with the U.K.’s economic future, by way of projects like HS2 – the large scale infrastructure project that is designed to herald a new era for the different parts of the U.K. by linking them together by high-speed rail networks. In this post, we will get an update on proceedings in this particular case because, as predicted, the situation is worsening by the day and the realisation that Carillion could collapse moves closer and closer as each stage of the rescue-process fails. Whilst the same points will be repeated i.e. the danger of such a collapse for an intertwined company, a new emphasis will be placed upon a potential ‘bail-out culture’ that may emerge as the U.K. heads into unchartered and particularly choppy waters post-Brexit.

At the moment, almost 200 creditors are engaged in negotiations regarding Carillion’s future, with analysts suggesting that the U.K.’s second-largest construction firm has nearly £1.5 billion’s worth of debt, as opposed to market capitalisation of just £81 million; these stories are beginning to coalesce, with suggestions being that the leading banks are reluctant to continue lending to the embattled firm, and creditors suggesting that a decision, either way, will be made before the end of the month. To compound the company’s problems, it is currently under investigation by the Financial Conduct Authority (FCA) with regards to stock declarations it made last year which, if found guilty, could be the turning point in the firm’s fight for survival – whilst a fine would not damage the company because, as we know, the FCA’s fines are hardly threatening, the reputational damage to a company seeking financial assistance could be critical. For the Government’s part, it is being suggested in the media that the Government has already put plans in place to cushion the blow if the company were to ultimately fail, which is something which is becoming more of a reality by the day, particularly considering the company’s stock value plummeting by almost 90% recently against debts of £1 billion (according to The Guardian) and a pension deficit of near £600 million. However, the actual tone of the Government’s response to the crisis can be read in two ways, with the Cabinet Office’s Parliamentary Secretary stating that ‘we of course make contingency plans for all eventualities… Carillion’s operational performance has continued to be positive [and] the company has kept us informed of the steps it is taking to restructure the business. We remain supportive of their ongoing discussions…’. The two ways in which we can read into statements such as these are either (a) the company is too-big-to-fail, as some analysts have suggested and, therefore, assistance will be provided anyway, or (b), which is almost a given, the Government is hamstrung in this instance because any negative narrative displayed by the Government would be, in all likelihood, an instant deathblow to the embattled company. We have spoken before about the so-called ‘public private partnerships’ (here and here) and, arguably, we are now seeing one of the two natural ‘endpoints’ to that arrangement.

Ultimately, the firm appears to be close to approaching the dreaded ‘point of no return’, and if it does collapse the impact will be massive for a number of distinct reasons. Firstly, the firm employs nearly 20,000 people and its pension deficit would have to be, mostly, absorbed by the national fisc, which would be particularly bad timing given the financial no-mans-land the country is seemingly heading to with regards to Brexit. Secondly, for a company to fail that is so intertwined within the country’s infrastructural future would present an incredible situation whereby projects that have been designed with Carillion’s capacity in mind will have to be taken up by other companies. However, perhaps the most crucial impact will be on that aspect that is touted, almost daily, as being the lifeblood of the business world – confidence. For Carillion to collapse, so close to the Country’s secession from the European Union, could have massive consequences for the economic and political landscape in this country. It is for these reasons that the analysts who have suggested that the company is actually too-big-to-fail will likely end up being proved correct; the intricacies of TBTF is that one is not considered in this category by way of their market capitalisation or anything financial, so to speak, but by how much they are intertwined with the country’s health – Carillion certainly fits that bill. The financial blow would be manageable, but allowing Carillion to fail will send ripples through the business community that may very well turn into waves at a rapid rate – the Government’s hands are, presumably, tied in this regard but, as always, it is the public who will pay the price. As the NHS buckles under the increasing pressure exerted on it in this austerity-driven era, it is likely that money will be diverted to protecting private business; quite the microcosm for the current political climate.


Keywords – Carillion, Construction, Public Private Partnerships, Finance, Company Law, Bail Outs, Politics, Business, @finregmatters

Tuesday, 9 January 2018

The Continuing Struggle with Debt: Focusing on the Real Stories

Here in Financial Regulation Matters we have looked at the issue of personal debt before, with posts ranging from the ever-growing crisis to the predatory lending that exists within the sector. In today’s post, we will be looking at the figures that have been released by a blog for Bank of England (BoE) staff – it is not a usual blog, but a vehicle for BoE staff to openly discuss certain policies and aspects that affect policies – that describe how the situation for everyday consumers is a cyclical, almost hopeless process that many stay trapped in for decades. This analysis will be counteracted by the news stories that receive plenty of attention in the media, with the aim being to illustrate how consumer confidence is almost enshrined within the modus operandi of the system, even in the face of opposing, and often devastating facts.

The news has been awash recently with stories about consumers operating more shrewdly in the credit markets (in relation to switching between better arrangements with credit cards etc.), or that the amount of credit consumption actually dropped in December which, according to the news represents hope in this particular marketplace. Furthermore, HMRC has moved to ban the use of credit cards for the payment of tax, which is supposedly aimed at reducing credit dependency. However, there are still many who point to the remarkable explosion of the credit bubble in the UK alone, with some pointing at recent figures which suggested that, as according to the Office of National Statistics, the bubble now stands at £392 billion and counting, with the additional warning that household debt could go past £20,000 by the end of this current Parliament. It is this type of statistic that correctly frames the results of a recent study by employees at the BoE – although not acting in that capacity – which suggests that nearly 90% of all outstanding credit is held by those who were also in debt two years earlier; the inference, quite clearly, is that these people are trapped in the credit cycle, and despite being able to transfer balances remain within the cycle.

The media was quick to pick up on the fact that of those in debt, the spike is not down to excessively risky borrowers – i.e. ‘sub-prime’ borrowers, but there was an acknowledgement that the stagnation in real earnings was having the obvious effect of keeping people within the credit cycle. One argument is that the time of year is having a disproportionate effect, with figures released recently that suggest that around 7.9 million Britons are likely to fall behind with their finances on account of spending in the run up to the Christmas period and, across the board and not including mortgage repayments, the average Briton now owes over £8,000. Yet, it is very easy to get lost or misguided by the semantics being used within the common narrative.

There has been plenty of talk about ‘credit binges’ and all the seasonal data referenced above points towards the problem of stagnation in terms of real income affecting people’s sensitivities to what they perceive as their ‘standard of living’; the inference being that people have become accustomed to a certain way of living and have not adjusted their budgets accordingly in the downturn. However, other figures suggest that this Conservative narrative portrays a reality that is little more than a falsehood, because last year there were record numbers using food banks, to use just one example. The obvious counter-argument is that not all of those using food banks account for all of those in debt, which is correct, but the reality of the situation is that more people than ever – in the modern era – are operating just above, or in many cases below, the so-called ‘breadline’. What this describes for us is the understanding that the so-called ‘average’ person is struggling to cope with the onslaught since the Crisis and, even a decade on, one of the largest instances of wealth extraction continues to significantly and negatively affect the poorer classes specifically. This reality is not that one that has been dreamed up by this author, but in fact comes from the mouth of the new Secretary for Work and Pensions in the U.K., Esther McVey. McVey, speaking just a few years ago, stating quite boldly that ‘in the U.K., it is right that more people are… going to food banks because as times are tough, we are all having to pay back this £1.5 trillion debt personally…’ which should, of course, remind of us of the equally remarkable comments made by Jacob Rees-Mogg. Whilst the wealth of the current cabinet has not been calculated yet, on account of it only reforming over the past few days, it is safe to say that it is comprised only, if not majoritively, of millionaires which leaves us with the disgusting reality, once again, of millionaires telling the public that it is right that they struggle even though the effect of systemic wealth extraction has damaged them disproportionately. McVey’s appointment is the latest in a long and continuing line of events that confirms that, for those suffering, the end is not in sight. With people trapped within the credit cycle, and many others forced to use food banks, despite often holding employment, the reality of the situation is that the people who can affect real change not only will not do so, but believe it is ‘right’ that this imbalance both exists and continues. Whilst many news stories impact society, it is the financial news which, arguably, presents the reality of the situation, if deciphered correctly – deciphering this current batch of financial news makes for depressing reading, unfortunately.


Keywords – debt, politics, business, credit, economy, finance, consumers, poverty, food banks, @finregmatters

Sunday, 7 January 2018

KPMG Separates from the Grenfell Tower Inquiry: A Closer Examination

Today’s post reacts to the news that broke this evening concerning the massive accountancy (and advisory) firm KPMG’s withdrawal from the inquiry into the Grenfell Tower fire that occurred last June. Whilst this post will not discuss the Grenfell Tower disaster in any great detail – mostly because it is an extremely emotive subject but also because the Inquiry still has some way to go before concluding – it is worthwhile looking at two specific instances: the most important is to look at why KPMG today released a statement that it had ‘mutually agreed with the inquiry that we will step down from our role with immediate effect’, but it is also worth asking why KPMG was considered an appropriate source of advice in the first place – does the firm’s track record, particularly in the modern era, reveal for us the processes underpinning this most important of inquiries?

KPMG is one constituent part of the so-called ‘Big Four’ – the oligopolistic partners within the accounting industry – and its history is a long and storied one. Consisting of a merger between four different firms (with the oldest dating back to 1870 with William Barclay Peat and Co) that took place in 1987, the firm has catapulted itself to a position of genuine influence within the modern economy. However, that propulsion has with it a number of associated instances, with a number standing out. Using the turn of the century as a good starting point in relation to the behaviour within the accounting industry, KPMG’s transgressions, arguably, went under the radar whilst its then-competitor Arthur Andersen was publically decimated for its role in the Enron Scandal; whilst the fall of Arthur Andersen is oft cited, KMPG’s ‘deferred prosecution agreement’ with the U.S. Department of Justice (DoJ) for $456 million (plus $225 million in private settlements) is rarely mentioned, as is the sentences handed to a number of senior KMPG officials for their role in the providing of ‘tax shelters’ which allowed the wealthy to avoid paying billions in tax contributions. That particular era was to be followed with another phase in which the accounting industry (particularly the ‘Big Four’ would transgress en masse whilst other financial service providers would be publically shamed; the Financial Crisis. Whilst big banks, credit rating agencies, mortgage providers and insurers would correctly see themselves publically identified and vilified for their roles in one of the largest instances of ‘wealth extraction’ to have ever been witnessed, the ‘Big Four’ would see their transgressions, again, go somewhat under the radar. During the lead-up to the Crisis, the large mortgage financiers and big banks did indeed partake in what was nothing other than systemic fraud, and credit rating agencies negligently provided their assurances to the overly-risky products that were at the centre of the impending crisis (and the insurance industry allowed for secondary markets and so on and so on), but a fact that was not given the right amount of attention was that for all of these financial juggernauts the requirement to have their balance sheets checked by independent and thorough third-parties remained – and this is where the accounting firms’ transgressions play their part, although the lack of ‘coverage’ would have one thinking differently if one did not appreciate the ‘culture’ within the largest financial firms. More recently, we looked at the continuing fines being handed to the ‘Big Four’, with KPMG being fined recently by the U.S. Securities and Exchange Commission (SEC) for mis-advising consumers in the favour of big business, which is a common theme within industries that offer advisory services for a high price (even the briefest of analyses of the Big Four’s financial statements reveal that advisory services make up a significant proportion of their income, and with that comes unique pressures that affect the role and purpose of an auditor). There have been a number of other instances along the way and there will undoubtedly be many more, but on the back of this admittedly brief review of just some of the industry’s transgressions, we will now review the details of the firm’s connection to the Grenfell Tower Inquiry.

The particular details of the case are currently being played out across the media, so for our purposes it will probably be best to be as simple as possible. Officially, the story goes that KPMG were appointed to advise on the structuring of a project management office for the Inquiry, with KPMG declaring that ‘our role was purely operational and advised on project management best practice and had no role advising on the substance of the inquiry’. However, a concerted campaign was initiated in response to the reality that there were likely a number of conflicts of interests present within the relationship; the campaign culminated in an ‘open letter’ being sent to the Prime Ministers from campaigners, academics, and MPs declaring their belief that KPMG was too conflicted to provide independent advice to the Inquiry, and the details of the campaigners’ claim deserve to be looked at. Most glaringly, the auditor that was hired to provide assistance to the Inquiry is, inexplicably, the same firm that audits the parent company of Celotex, the firm that produced the insulation for Grenfell Tower which has, to this point at least, been identified as a key component in the disaster, as well as auditing the Royal Borough of Kensington and Chelsea and Rydon Group, the firm contracted to refurbish the Tower. This intertwining of the auditor in the business of three entities that had a massive role in the disaster should have prevented the firm even being considered for the role of advisor to the Inquiry, but is this the case in reality?

MPs and Campaigners have greeted KPMG’s decision to withdraw from the arrangement with a small amount of pleasure (relatively speaking), but have been quick to note that the inference of this sequence of events is a negative one; one campaigner noted that ‘this appointment was yet another example of the government’s deafness to local needs’, which is absolutely correct. However, here in Financial Regulation Matters we are consistently looking to analyse the inference as well as what is stated and, rather unfortunately, this chain of events can be seen to illustrate something which is particularly tragic, but illuminative of the society we currently inhabit. Yes the Inquiry is extremely important, but the reality of the situation, when articulated, makes for tragic reading. The first instance to note was the Government’s, and particularly Theresa May’s, absolutely abysmal handling of the aftermath of the disaster, which came complete with a number of broken promises like the fitting of sprinkler systems to similar residences (something which the Prime Minister would later say could not be afforded). However, even more devastatingly, at the time of writing residents of Grenfell Tower have still not been rehomed, which has led to a string of criticism but still very little action from the Government; David Lammy MP, one of the most vocal critics of the Government’s handling of the disaster, is clear in his understanding that there is a chasm between the citizen and their representatives in this, and many other circumstances; perhaps, as Lammy notes, that may indeed be at the core of the problem. Theresa May was asked in the House of Commons how safe she would feel living on the 20th floor of a large Tower Block with no sprinkler system and erroneous safety advice (and inadequate cladding and insulation and so on and so on) and the simple answer to that poignant question is that she simply will never experience that scenario – so, how representative can she really be? What she, and the Government moreover do understand however is business, and the protection of big business to be precise. Yet, it is too easy to suggest that KPMG was allowed to advise the Inquiry because of its ashamedly pro-business culture, because in reality what we are witnessing in this scenario is just the latest in a long line of division that underpins most of modern society (particularly in the U.K.) – the people who tragically perished in Grenfell Tower were, by and large, poor people, and overlooking that fact is, and always will be a tremendous error. The cladding that was attached to the building, the cladding which allowed for the fire to spread at an alarming and debilitating rate, was erected to mask the aesthetics for those who owned homes in the much richer parts of that particular borough. The companies which were contracted to carry out significant and important work on the building are owned by wealthy individuals. Now, the Inquiry that has been set up to, seemingly, provide answers to the public as to the events that led to that horrific sight of a large building being gutted by fire with its occupants trapped, is being advised by a company that all the other companies pay for services on a number of other occasions. It is easy to dismiss this connection as being demonstrative of a larger and more brutal reality, but it is vital that we seek to assess situations within this particular paradigm; if the scenario does not fit the paradigm then that is great, but the incredible amount of times that it is does presents an awful reality in which the poor are being consistently abused, and without any conceivable recourse. The actions of the campaigners who highlighted these conflicts and brought about KMPG’s withdrawal is just one heroic action in a long list of heroic actions that have followed the disaster as many attempt to seek justice for those who were tragically killed last year – that they have to do so much to get justice is, perhaps, illustrative of the real problem we face.


Keywords – KPMG, Grenfell Tower, Theresa May, Politics, Business, Audit, @finregmatters