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Like most people approaching their seventh decade, Liz Bridge was beginning to think about retirement and collecting her pension. She had worked as the Construction Confederation鈥檚 tax expert for 20 years and was expecting a sum large enough to provide her with a living for the next 20. That was until it emerged that the organisation had a 拢20m black hole where its pension fund ought to have been. Bridge says she is 鈥渟eriously frightened鈥�. 鈥淵our pension is part of the contract you sign with your employer; I鈥檓 devastated that it won鈥檛 be anything like the pension I was promised.鈥�

She is not alone. Two weeks ago, about 500 people received a letter from the trustees of the CC鈥檚 pension scheme, informing them that the organisation had a deficit 鈥渋n excess of 拢20m鈥�, which was half the sum it needed to cover its obligations.

The five trustees, who include Bridge, are now embarking on a desperate attempt to find money to fill the shortfall. Their first hope is to secure a bailout from the Pension Protection Fund (PPF). This was set up to provide compensation to members of defined benefit schemes if a company became insolvent and did not have enough money in its pot to pay its pensioners. But help from here is far from certain: the confederation is an unincorporated body, so the first step is to apply to the courts to have it recognised as a company, and this is an unprecedented move.

Even if access to the PPF is granted, it will still leave some pensioners in the cold, and reduce the amount paid to others (see below). The trustees are hoping to supplement it by asking for a contribution from current and former member organisations of the confederation, such as the National Federation of Builders (NFB) and the Civil Engineering Contractors Association (CECA). They are also taking legal advice as to whether former officers of the confederation may be liable, including industry grandees such as James Wates and Malcolm McAlpine.

But it may not even stop there. If the trade bodies are liable, many lack the financial clout to cover the shortfall. Lawyers say this could lead to claims against their member bodies. Here, we look at how the debacle arose, and who stands to lose what.

How it started

Although the pension fund鈥檚 trustees were aware that a deficit existed, it is understood that none knew how large it was until February, when they were told that the confederation would be closing at the end of the year. In the letter to members of the pension scheme, the trustees said the confederation had 鈥渋ntimated鈥� to them on a number of occasions 鈥渢hat it intended to pay something to the scheme鈥�. The letter goes on: 鈥淚t has now transpired that it is not going to do so. In fact, CC is insolvent and unable to meet its obligations.鈥�

鈥淲e thought there might be assets we didn鈥檛 know of,鈥� one trustee said. 鈥淲e didn鈥檛 know where the money would come from, but the discussions were held in good faith and we did think it would come.鈥�

It is common for pension schemes to have a deficit, though it is unusual for it to be so large. Elmer Doonan, partner in law firm Denton Wilde Sapte, who is advising the trustees, says that until just six years ago, actuaries were using out-of-date mortality tables that predicted men living until 70, rather than a more realistic 80. This has depleted funds that were set up to cater for people with shorter lifespans.

In August, the trustees held meetings with officials from the CC, the PPF and the Pensions Regulator to look for ways to plug the deficit. The PPF and the regulator are understood to have told the CC to make an offer that would settle the liability, but its officers did not come up with any proposal.

A source close to the matter said the problem with the deficit became acute because the confederation had assumed it would be in business indefinitely: it had planned to reduce the deficit to 拢10m over a period of 10-20 years.

The cost

The trustees hope to know by the end of November whether the CC will be classed as a company and be liquidated, which will allow it to apply to the PPF. A pensions expert described this as 鈥渆xtremely unusual鈥�. 鈥淭he PPF hasn鈥檛 been tested before as to whether it will cover an unincorporated organisation. This case will set a precedent,鈥� he said.

If the PPF is not granted and the shortfall is not made up, it will be those members that have not yet started to claim their pensions who will be hardest hit, because priority is given to those already drawing money. There are about 350 people like this, and they could lose up to 70% of their entitlement.

Even if the PPF is granted, members of the scheme will still suffer a loss. Those who took their pension before April 1997 will not receive an annual increase as they do under the present scheme, while those who have yet to claim will only receive 90% of their pensions up to a cap of 拢30,000.

About 120 employees of the Home Builders Federation (HBF) could face even worse losses. The federation pulled out of the scheme in August 2005, which meant its members were placed in a separate account. As much as 拢3.6m of the 拢20m deficit is needed to cover these members, but that account will not be covered by the PPF because the HBF is not insolvent.

Members of this scheme are now dependent on a goodwill gesture from the HBF to plug the hole. 鈥淭heir pension entitlement has been devastated,鈥� one trustee said. 鈥淔irms in the HBF membership ought morally to be thinking about making a contribution, or their long-term employees will have seriously diminished pensions.鈥�

Who will be asked to foot the bill?

Member organisations will be pursued to foot the bill, but how much they will be able to give is uncertain. In its most recent figures, the NFB, which is the largest organisation with 12,000 members, had a turnover of 拢3.8m. The body, which is in process of restructuring, is already struggling with its own financial problems and is due to close two offices.

Meanwhile, data from Experian shows CECA as having a net worth of just over 拢180,000, and the British Woodworking Federation is worth 拢135,000. This, lawyers say, means the claim could cascade down to these organisations鈥� members, depending on their constitutions. Doonan, the partner in Denton Wilde Sapte, said he has already asked the NFB for a copy of its constitution to check this point. This is particularly important because trustees may choose to save on legal costs by going for the NFB alone.

Individual CC officers, past and present, could also be investigated and claims made, if it is found they failed to take action to offset the deficit. Doonan says: 鈥淭he trustees have obligations to the members. They can鈥檛 just ignore what鈥檚 happened, and it may be that they have to ask some hard questions.鈥�

Meanwhile, Doonan said legal bills could amount to 拢1m. 鈥淭hey are a big concern,鈥� he said. One source close to the proceedings criticised the trustees. He asked: 鈥淲hy are they wasting money on lawyers instead of finding an equitable solution?鈥� But Doonan defended the trustees鈥� actions: 鈥淭hey have at all times done their best,鈥� he said. 鈥淭hey鈥檝e been making their position clear for a long time.鈥�

What is certainly clear is that, for Liz Bridge and the other scheme members, the next few months will be a frightening time. 鈥淚t鈥檚 unprecedented,鈥� she says, 鈥淚 just don鈥檛 know whether to be hopeful or not.鈥�