Companies with defined benefit (DB) schemes are prioritising dividend payments over pension contributions, resulting in increased deficits and a worsening outlook for the sector, The Pensions Regulator (TPR) has said.
In its annual funding statement released today, the regulator said the average company was paying 10 times as much in dividends as it was in deficit recovery contributions (DRCs).
The figures mark a considerable decrease from 2010, when the DRC to dividend ratio was 17 per cent.
Such a fall in contributions had probably led to an increase in most schemes’ deficits, and would force them to reassess the recovery plans, TPR stated.
According to the regulator, 40 per cent of profitable companies would need to contribute more to their schemes, and could do so without harming the business. The remaining 60 per cent, meanwhile, could easily afford to pay 10 per cent of profits into their schemes.
TPR executive director of regulatory policy Andrew Warwick-Thompson urged scheme trustees to question their sponsoring business’s dividend policy.
“Our data suggests that profits have increased for the majority of employers and that many are able to maintain or increase current DRCs. We understand that investing for growth in their business will mean some employers cannot increase DRCs.
“We expect employers to discuss this openly with their trustees. It is important that employers treat their pension scheme fairly and we expect trustees to question employers’ dividend policies where DRCs are constrained.”
Kevin Titmus, a financial planner with Future Planning Wealth Management, said underfunding of DB schemes should “concern everybody”.
“From my clients’ point of view, if these schemes are underfunded it’s going to cause real problems in the future.”
However, he said the Pension Protection Fund, which insures members against the failure of their scheme, means most DB schemes are much better value than defined contribution schemes.