Funding of HPS

The HPA committee is concerned about the non-publication of various reports including the 2011 HPS review, the 2014 HPS annual report, the 2014 Halcrow Group annual report and the 2014 CH2M Hill annual report. We understand that a CH2M management response to a question at a Burderop Park staff meeting in late June 2015 indicated that they expected the pension scheme funding issue to be resolved by the end of September. Published CH2M documents acknowledge the liabilities associated with the pension schemes inherited through the acquisition of Halcrow (see below). This information suggests an ongoing dialogue between the HPS trustees and the company management and our suspicion is that the key issue is the level of funding expected from the company.

The 2011 HPS triennial review has still not been published, over 2½ years after its statutory deadline for completion. The information in that review, if it ever emerges, is now somewhat out of date but there has been no mention of any progress with the 2014 triennial review for which the statutory deadline is the end of March 2016. Nor has the 2014 HPS report to members been issued. Previously this has been sent out in the following September.  Furthermore, neither the 2014 Halcrow accounts nor the 2014 accounts for CH2M Hill Europe (the subsidiary of CH2M Hill that purchased Halcrow) have been submitted to Companies House. They were due by the end of September 2015. In contrast, the 2013 Halcrow accounts were submitted in July 2014 and the CH2M Hill Europe accounts in September 2014.

We have, therefore, to wonder whether the dearth of released documents is linked to the ongoing discussions about the company contribution to the Halcrow Pension Scheme. The trustees are obliged to agree a recovery plan with the sponsoring company and it is evident from the available information that a substantial increase in the company contributions would be needed to clear the HPS deficit within a reasonable period of time. However, the auditors, in the company's annual report, also need to indicate whether they consider the company to be a going concern. Page 9 of the 2013 Halcrow Annual Report includes the statement: "The Company is dependent on continued support from its Parent and ultimate Parent, CH2M HILL Companies, Ltd., including for any additional funding that might be required, and no certainty has been provided in respect of this support. This matter, together with the other matters explained in Note 1, indicates the existence of a material uncertainty which may cast significant doubt on the Company's ability to continue as a going concern." This remark highlights the impact of the pension scheme contributions on the business viability. If the contributions exceed the gross profits then the long term viability is in doubt.

CH2M Hill have acknowledged the funding requirement of the inherited pension schemes and the company's position is set out in their 2014 annual report: "As a result of our acquisition of Halcrow, the Company acquired defined benefit pension plans (also known as “defined benefit pension schemes”) that have significant deficits. The ongoing funding obligations for the defined benefit pension plans vary from time to time depending on actuarial assumptions outside of the Company’s control, such as discount rates, inflation rates, plan investment returns, and life expectancy of the plan members. In order to maintain an adequate funding position over time, the Company continuously reviews these assumptions and mitigates these risks by working with the pension plan trustees and with actuarial and investment advisors. The Company maintains an ongoing dialog with its pension plan trustees to negotiate a reasonable schedule for cash contributions as required by local regulations. If, however, we are unable to agree such schedule in the future, or if certain assumptions that are outside our control, such as discount rates, inflation rates, plan investment returns or life expectancy change over time, the Company may need to make cash payments to such plans in order to meet such funding obligations, we could have material adverse effects on our financial position and/or cash flows." This statement is also reiterated in their European prospectus.

It will not be easy to reach a satisfactory outcome to this conflict between the interests of different parties. At present, the company continues to make contributions to HPS based on the funding plan agreed in the 2008 HPS triennial review and which was in being followed at the time of CH2M Hill's acquisition of Halcrow. It appears to be in the company's interest to avoid agreement of the assumptions of future liabilities if this postpones the need to make larger payments. However, HPA wonders whether this lack of agreement discourages the HPS trustees from sharing their own estimates of the scheme status, both assets and liabilities, with the HPS members. It is also unknown whether similar dialogue is ongoing between the company and other pension schemes to which the company contributes: Any reduction in company payments to HPS should be matched by similar reductions in payments to other schemes.

The Pensions Regulator will expect to see an agreed recovery plan to restore financial health to HPS as an outcome of the triennial review. However the company, understandably, would not want to commit to a level of payments substantially in excess of such profits as Halcrow might be expected to generate but appears to be willing to continue contributions at the current level. Agreement to a new funding plan can be stalled by disagreement with the assumptions (as noted in the CH2M annual report above). Ultimately, such an arrangement will be unsustainable as the HPS reserves start to be drawn down as the result of an increase in the pensions in payment. Pension schemes with deficits which require contributions that risk making companies bankrupt may end up with the Pension Protection Fund.