黑洞社区

For one well-known and respected infrastructure designer in the construction industry, his company鈥檚 pension deficit could dramatically change his life.

Approaching retirement age, due to the hanging spectre of his employer鈥檚 pension scheme deficit, this consultant, who declined to be named, potentially faces being on a fixed income pension plan for the rest of his life.

That means he will get no increases with inflation - so if everything starts to cost more, he will still get paid the same, potentially halving his spending power over time.

This scenario would unfold should a proposal by the employer to address the deficit be rejected and leave the scheme in the hands of the Pension Protection Fund.

And that鈥檚 because his employer Halcrow - owned by American engineering giant CH2M - has racked up a spiralling pension scheme deficit of 拢600m, bigger than that of BHS.

鈥淚t鈥檚 a very serious problem鈥�, says Edward Evans, co-chairman of the Halcrow Pensioners Association (HPA), which was set up by Halcrow pensioners to fight against planned cuts to their pensions. In doing so they sought the advice of lawyer Martin Jenkins, who represented pensioners affected by the Maxwell pension scandal (see box below).

Explaining the real impact these deficits can have on pensioners, Evans says: 鈥淚f you鈥檝e got a five-year period linked to inflation but you take that away, your spending power could be halved. That means you might not be able to afford your house anymore and you might have to downsize for example.鈥�

In practice, it is unlikely the drop would be quite that severe; a CH2M spokesperson points out that 鈥渋nflation is currently running at 0.3% a year鈥� and that for spending power to be halved, 鈥渋nflation would need to be running at 13% a year for five straight years, which has not happened in living memory.鈥�

However, the warning is clear. Evans adds: 鈥淲hat everybody is looking for is a minimum level of protection against inflation.鈥�

Halcrow has written to pensioners outlining a new scheme, giving them a 2.5% boost to their savings but cutting their annual increases from the current level of 5% to Consumer Price Indexed-inflation, which currently stands at 0.3%.

If pensioners reject the offer or do not reply by 5 August, their pensions will be moved to the state-backed pensions lifeboat the Pension Protection Fund (PPF), where retirement-age pensioners would receive full payments but no increases, while those not of retirement age would take a 10% cut and be subject to the earnings cap.

Halcrow鈥檚 parent CH2M has argued that if a solution is not found soon to the pension deficit issue, it would mean Halcrow being insolvent with 4,000 jobs being lost and the Halcrow pension scheme therefore entering the PPF, which takes on schemes from insolvent companies.

While the situation isn鈥檛 as dire at other firms, Halcrow is certainly not only the company in the construction industry struggling pension-wise with a noose around its neck.

The latest accounts filed at Companies House for several big firms - mainly consultants - show many are saddled with big deficits.

The UK and Europe boss of Atkins, Nick Roberts, recently told 黑洞社区 his firm was 鈥榬obust and resolute鈥� about managing its 拢265m pension black hole, which in all fairness was down from 拢298m the previous year.

In its full-year results to 2015, Arup revealed it has a 拢139m pension deficit, while Mott MacDonald鈥檚 pension gap currently stands at 拢91m.

Overall, figures from the Pension Protection Fund and Pensions Regulator have revealed the deficit on the construction industry鈥檚 final salary schemes stands at a staggering 拢33.4bn.

Of course, construction is definitely not alone in accumulating large deficits, and no firm in the sector comes close to matching BT鈥檚 monolithic 拢10.6bn pension deficit or Shell鈥檚 拢6.7bn black hole.

But it certainly is an issue in construction. So what has caused so many firms in the industry, particularly consultants, to rack up such large deficits? And is it a problem?

Unfortunately there鈥檚 no magic formula. Either your employer pays in more, or you reduce benefits

Danny Cox, Hargreaves Lansdown

It鈥檚 all about salary schemes

The reason for the deficits lies in the popularity of defined benefit - or final salary - pension schemes back in the 1970s, 1980s and 1990s, when final salary pension pots grew rapidly and were widely seen as an asset rather than a liability.

Wildly popular at the back end of the last century, final salary schemes pay out a secure income for life, based on a proportion of a pensioner鈥檚 final salary, with annual increases, whereas defined contribution plans - much more common today - pay a lump sum which the scheme member then has to invest themselves to secure a regular retirement income.

But a whole host of problems over the past decade, including poor stock market performance - buyers and sellers on the stock market tend to be institutions such as pension funds - and poor returns on gilts (the term for UK government bonds) have made final salary schemes a recipe for disaster.

Add in the fact that people are generally living longer than ever before and the scale of the problem becomes clear.

Whereas contractors employ fewer staff themselves and have more blue collar workers paid at lower rates, for consultants the deficits are often worse, mostly because they are more likely to have a higher number of directly employed - and better remunerated - white collar workers.

Richard Saxon, former chairman of architecture practice BDP when it was struggling with a growing pension deficit, says the generosity of the schemes handed out by consultants has also made it a more acute issue for them compared with contractors.

He explains: 鈥淐onsultants had better schemes and often more benefits than contractors. Also, a lot of staff tend to stay a long time at consultants so they rack up more benefits.鈥�

While consultants have felt the impact the most within the sector, Saxon adds that pension deficits in construction companies in general have been exacerbated purely because of the nature of the industry.

He says: 鈥淥ur industry is highly cyclical, it magnifies the economy. If the economy goes down by 2%, construction goes down by 20%. It鈥檚 more difficult for our industry than any others.鈥�

What鈥檚 to be done?

It鈥檚 worth noting of course that firms don鈥檛 have to find the money immediately to plug any pension gap, and can tackle deficits in a 20-30 year timeframe. But at the end of the day, that extra money still needs paying.

So what can firms with spiralling deficits on these final salary pensions schemes do to tackle the problem?

Danny Cox, a chartered financial planner at investment firm Hargreaves Lansdown, warns there is no easy answer.

He says: 鈥淯nfortunately there鈥檚 no magic formula. Either your employer pays in more, or you reduce benefits.鈥�

On the latter point, he adds: 鈥淪witching the rate of inflation-linked increases from the higher RPI [Retail Price Index] rate to the lower CPI [Consumer Price Index] does have an effect on reducing the cost of pension schemes.

鈥淎lso, encouraging people to transfer away from the scheme when it best suits them will also help.鈥� Some pensioners have decided to transfer out of final salary schemes due to their inflexibility, as such schemes provide a fixed income for life but no option to take a lump sum.

For BDP, Saxon says a combination of market recovery and sticking to a repayment plan agreed with the PPF helped the architect overcome its 鈥渦naffordable鈥� pension deficit.

The practice had struggled at one point with an 拢88m deficit - which it said was threatening its 鈥渇undamental financial sustainability鈥� - but an upturn in the market after the recession and BDP鈥檚 increasing profitability meant payments to cover the deficit became affordable again, allowing the firm to get a grip on the issue.

Almost all employers in construction, along with most in virtually all other sectors, have now closed final salary schemes to new members, ushering the end of an era for 鈥済old-plated鈥� pensions.

But just because the schemes may disappear, that doesn鈥檛 mean the problems will too. Firms that ran final salary schemes will still have to honour all of their historic commitments, being lumbered with the pay-outs until the last member dies.

And in fact, Saxon believes the pension problems will get worse. He says: 鈥淗owever bad it is now, it鈥檚 going to get worse. People are continuing to live longer and interest rates are falling so returns on investment are weaker.鈥�

It鈥檚 said that only an actuary worries about people living longer. But given the swelling deficits of final salary pension schemes, perhaps construction firms are starting to worry too.