Dixons Carphone in the spotlight

28 / 06 / 2018

Geoffrey Budd, Chairman of the trustee of the Dixons Carphone defined benefit pension scheme, was the recipient of a letter from Frank Field dated 1 June this year.

The letter followed Dixons Carphone’s most recent trading update announcing the closure of 92 Carphone Warehouse stores and a drop in projected pre-tax profits (estimated at £382m, down from £501m in 2016/17) and comes hot on the heels of the Business, Energy and Industrial Strategy and Work and Pensions Committees joint report on Carillion. Dixons Carphone’s annual contributions into the pension scheme are currently set at some £46m, with a deficit at October 2017 on the IAS19 accounting basis of £492m.

The letter notes (among other points) that:

“The new Group Chief Executive remarked in the latest update that “there’s plenty to fix” in the company and that “nobody is happy with our performance today””

and asks the question:

“As the company pursues its plans to address these issues, to what extent is it keeping the pension scheme trustees informed and engaged?”

The letter also makes particular reference to the fact that the company’s full-year dividend will be maintained at the same level despite the profit warning. This comment points to the increasingly high-profile requirement for sponsoring employers to balance the need to attract and retain investors – potentially securing the viability of the business – with the funding and security of their pension schemes.

Dividends and senior executive bonuses paid by Carillion were the focus of intense criticism in the joint report published on 16 May. The report found that Carillion’s dividend payments, which increased year on year, “bore little relation to its volatile corporate performance” and “long term obligations, such as adequately funding its pension schemes, were treated with contempt”.

Whilst Carillion appears to have been an exceptional perfect storm, there is no doubt that the Pensions Regulator is under yet more pressure to show its teeth and move proactively. The joint report made scathing criticisms about the (lack of) action taken by the Regulator, commenting that it was feeble and timid (alongside the Financial Reporting Council) and citing seven instances of empty threats to enforce payment of pension contributions. The Regulator was criticised for not offering any serious challenge to Carillion’s dividend policy in the context of inadequate contributions, despite its own guidance that dividend policies should be considered as part of a recovery plan.

Andrew Warwick-Thompson (the Regulator’s Executive Director for Regulatory Policy) has now stated in a press release on 13 June 2017 that:

“[I]f we [the Regulator] see a situation where we believe a scheme is not being treated fairly, we are likely to intervene. For example, if a company is paying out more in dividends than in deficit reduction contributions, we will expect to see a short recovery plan. And we will expect that recovery plan to be underpinned by an appropriate investment strategy.”

As the Regulator’s role continues to develop, it will be very interesting to see how the Dixons Carphone trustees and the Regulator work together whilst Dixons Carphone deals with these challenges. It will be difficult not to draw comparisons (however fair or unfair these might be) against the actions we have seen the Regulator take in respect of Carillion in the years leading up to the construction company’s collapse.

For further information please contact Katie Whitford