Of all that is being said about the collapse of Carillon, the comment that remains with me is something said by Robin Ellison, in his capacity as   in an interview with IPE.

The FCA is looking at asset management companies’ margins, suggesting that the average figure of 35% is too high. For Ellison, those margin levels seem “about right” for a service industry. Other industries – such as construction, where the figure is closer to 5% – are content with lower levels.

When we have growled about executive pay, distribution of dividends and the cost of historic pension legislation, the bottom line remains. There was insufficient money coming in, to afford the payments going out. At the beginning of this week, Carillon has only £29m cash in the bank, it was not trading as a going concern. It went  bust.

So just who was content with a 5% margin on construction contracts? I suppose those awarded the contracts – Government- and in the short term- the tax-payer. Collectively we drove the price of the services we were asking of Carillion below a level that Carillion could withstand and it went bust. The logic of this argument is that Government and the tax-payer need to take a long hard look at the way we run large construction contracts (and finance them).

So who wins from low margins?

So  don’t agree that Carillion and their competitors were happy with the 5% margins they were keeping. The article is dated March 2017, before the first of the Carillon profit warnings. I suspect that at the point this interview was given, Robin was content with the employer’s covenant too.

But in July 2017, the wheels fell off. The cordial relationship between Carillion and the City was over for ever. What followed after was simply the aftershocks of the July profit warning.

The bad news in July surprised everyone

Received wisdom says that you cannot run a business for ever on wafer-thin margins , sooner or later – you will hit a problem – as Carillion did, and there will be insufficient reserves to meet the ongoing liabilities (including the liabilities of its various defined benefit pension plans (and their deficit recovery plans).

Who defends the indefensible? A fool or a joker!

I suspect that Robin knew that, just as he knows that the 35% margins for asset managers (and service industry margins in general) are unsustainable. Robin Ellison’s career has been established on his having the Chutzpah to defend the indefensible, (while doing the right thing despite what he says).

Nobody negotiates with a fund manager , knowing that they’re charging seven times the margin that you’re getting from your customers, without questioning those margins and I simply don’t believe that Robin was prepared to subsidise the lifestyles of those in the City at the expense of the Carillion shareholders.

Robin Ellison was not in a corner, I suspect that he was in wind-up mode.

A failure in market economics

Of course Robin is of the City and of the service sector and he has enjoyed the margins to which he has referred. He is a very extreme cases of someone who puts his money where his mouth is and attacks regulation at every opportunity. His great friend, Con Keating , when asked last week by the FCA  for his views suggested that “the only good regulator is a dead regulator”. I am sure that Robin would have agreed – Con too can see the funny side.

But to have a de-regulated system, whether we are referring thinking of an enterprise or its pension scheme, we need to have strong internal controls. In most British companies, these controls exist, at Carillion, they appear to have broken down, Carillion is the exception that proves the rule – it is not the rule itself. Carillion is a market failure, not a regulatory failure.

Which is why we have the PPF. Ordinary people should not be solely dependent on the covenant of an employer for the payment of pension promises, there should be a pooling of risk, which is what the PPF does – the PPF takes the risk that an employers cannot take and it manages it off with the help of stronger companies (that pay a levy). I have no doubt that the PPF will absorb whatever part of Carillion’s schemes – it gets landed with, it is a success. Robin has the comfort of offering us his “laissez-faire” views from his tight-rope , while others tighten the safety net below him.

Again, I suspect that wry smile on Robin’s face – an endearing feature of his Chutzpah, is his delight in having someone else’s cake and eating it.

 Robin is not wrong, he’s naughtily right!

Re-reading Robin’s interview to IPE , I can see why he is one of the few Trustee Chair’s who I would have dinner with. He repeatedly points out the fallacies of conventional de-risking, the need to take long-term views and the positives of direct investment into infrastructure (what a few months later is being called “patient capital”). Were I to afford to eat in Robin’s restaurants, I would buy him supper and listen to him speak all night,

Robin’s provocative comments throughout the IPE article, make for great reading. I am sure he enjoyed the interview as Carlo Moreolo enjoyed writing it up.

It remains a cameo that could variously be described as “pride before a fall” or of “mischievous prescience”. I prefer the latter.

However the fun has now stopped, the PPF have arrived, the schemes will go – quickly I suspect, into the PPF (there are already 5,900 of the 28,000 members in the lifeboat).

We now have the extra moral hazard for those who want to keep schemes out of the PPF, that members become vulnerable to lastminute.scam. Much as I would like to see Tarmac and McAlpine and other great schemes soldier on, I fear that we live in a wicked world, and the mischief that Robin Ellison can manage, will be visited on his members without Robin’s integrity and humanity.

In defence of Chutzpah.

We have much to learn from Carillion and – as it touches pensions – I look forward to more from Robin Ellison. His wit, Chutzpah and integrity will continue to be needed in the months ahead.

With a little humour, good will and understanding, the City and Carillion could have been friends. Sadly, these things seem to have been missing. What happened in July last year, suggests that the two were never really on speaking terms. Robin could have changed that.