Carillion had more than 400 contracts in place with UK local authorities when it collapsed last weekTony Williams, head of employer risk services at the Local Pensions Partnership (LPP), told IPE that each company seeking such an agreement was subject to a risk assessment by the LGPS to judge its viability and the risk of insolvency. The fund can then recommend that a bond or other form of indemnity is required as security against any potential pension debt.LPP – a collaboration between the London Pensions Fund Authority and Lancashire County Pension Fund – had no exposure to Carillion at the time of its collapse, Williams said.He added: “A recommendation would not be made to admit a body that posed substantial risk to a fund until these concerns were fully addressed. LPP would also monitor the contractor annually via covenant reviews, with action taken if key risks were identified.”Williams said it was up to individual funds within the LGPS to decide how they addressed employer covenant risk.Following Carillion’s demise, he added, LGPS funds would need to assess their exposure and seek actuarial and legal advice about the agreements.In a column for the Observer newspaper published on 21 January, prime minister Theresa May pledged to bring in strict new rules to punish company executives “who try to line their own pockets by putting their workers’ pensions at risk”.Seven of Carillion’s own pension funds have entered the assessment period for entry into the Pension Protection Fund, the UK’s lifeboat fund for private sector defined benefit schemes. The company sponsored 14 schemes in total, with some linked to Carillion subsidiaries that have not yet been declared insolvent.The LGPS funds exposed to CarillionPrivate companies supplying local authorities and employing their staff are required to enter into ‘admission agreements’ with the relevant council. These agreements allow employees transferred to the service provider to continue to accrue LGPS benefits. They also outline how much the provider and employees must pay the LGPS towards the employees’ pension costs.According to 2016-17 annual reports, 13 pension funds within the LGPS system had Carillion as a contributing employer at the end of March 2017:Croydon Pension SchemeDurham County Council Pension FundGreater Manchester Pension FundHounslow Pension FundLondon Borough of Ealing Pension FundLondon Borough of Harrow Pension FundNottinghamshire Pension FundOxfordshire Pension FundSouth Yorkshire Pensions AuthorityTeeside Pension FundTyne & Wear Pension FundWest Midlands Pension FundWest Yorkshire Pension FundHounslow Council terminated its contract with Carillion to supply library services last summer. It is in the process of exiting a separate contract for the management of parks, cemeteries and allotments, according to a statement from the council.Croydon, Nottinghamshire, Teeside and West Midlands pension funds all said Carillion was up to date with contributions as of 15 January 2018.A spokesman for Ealing Council said Carillion still owed £5,000 to the pension fund in relation to “the recovery of the funding costs associated with early retirements on redundancy”. The scheme was also in discussions with liquidators PwC about a pension bond put in place with Carillion, the spokesman said. LGPS officials have been working to ascertain the shortfall in pension contributions as a result of Carillion’s liquidation. At least one of these – the pension fund for the London borough of Ealing – was in talks with liquidators PricewaterhouseCoopers (PwC) about recovering debts (see below).Jeff Houston, head of pensions at the Local Government Association, told IPE: “We don’t have all the data yet but early indications are that in the majority of cases Carillion was fully funded. Unless something unexpected pops up we therefore do not expect to see local authorities having to pick up any significant deficits as a result of this event.”As well as exposure to liabilities, a number of LGPS funds lost money because of exposure to Carillion shares or bonds.The LGPS Advisory Board said in a statement: “Only a very small number of LGPS funds had direct exposure to Carillion on the asset side.“We estimate their total losses to be in region of £3m to £4.5m, or around 0.03% to 0.05% of the total assets of those funds. This compares with the 21% growth in asset values seen by LGPS funds in 2017.”Cost-sharing agreementsContractors applying to join the LGPS must seek an “admission agreement” with the relevant LGPS fund.Martin McFall, a partner in the pensions department at UK law firm Trowers & Hamlins, explained that contractors often persuaded councils to take on more pension costs in return for a lower price for the service being outsourced.In addition, under LGPS rules any employees aged over 55 who are made redundant are entitled to take their pension in full, even if they are yet to reach retirement age. Normally, the employer would foot the bill for any additional costs related to this, but in Carillion’s case McFall said local councils could have to pay.“Each local authority is doing these calculations,” he said. “They don’t know yet what the scale is – and it could be significant.“And it’s not just Carillion; it may have sub-contracted some projects. They may not be able to continue [payments] and the council might have to pick up their costs.“A lot of councils sold [the risk sharing] as a lower service provider cost, and value for money, thinking the service provider was never going to go bust.” A number of UK public sector pension funds could face shortfalls following the collapse of construction company Carillion.The group was placed into liquidation on 15 January with a reported debt burden of £1.3bn (€1.5bn) and cash reserves of less than £30m.At the time of the collapse Carillion had more than 400 outsourcing contracts in place, according to media reports, providing services to local authorities including facilities management, maintenance, road building, library services and delivering school meals.Many of these contracts included cost-sharing agreements related to pensions provided by the Local Government Pension Scheme (LGPS) to staff transferring from the public sector to the private sector, meaning Carillion was registered as an employer contributing to 13 LGPS funds.