Defined Benefit  

Southern Water forced to plug pension deficit

Southern Water forced to plug pension deficit

Southern Water has agreed to pay an additional £50m into its defined benefit (DB) pension fund over a shorter period of time, after action from The Pensions Regulator (TPR).

The utilities company was scrutinised after an imbalance between the funds contributed to the Southern Water Pension Scheme, which has 4,000 members and a deficit of £252m, and the level of dividends paid to shareholders in 2016 and 2017.

In a report published yesterday (December 2), the watchdog stated Southern Water could have afforded to pay off the scheme’s deficit far sooner, especially given the £190m it paid in dividends in during the mentioned years.

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The company intended to pay dividends of approximately £210m between 2015 and 2020.

At the same time, it proposed halving its annual deficit recovery payments from around £20m to £10m a year.

The Pensions Regulator began regulatory proceedings and issued a warning notice to the trustee and company, to state it was seeking to exercise its Section 231 funding power over its concerns about the level of payments to the scheme.

Later, the watchdog opened an anti-avoidance investigation following the dividend payments by the company.

Southern Water has now introduced a dividend sharing mechanism, which means that if dividends are paid to shareholders above a certain threshold, the company will increase the amount it pays into the pension, ensuring the scheme shares more fairly in the company's success, The Pensions Regulator stated.

According to Nicola Parish, executive director of frontline regulation of The Pensions Regulator, during the watchdog's investigation, it became clear that the pension scheme's members were not being treated fairly.

She said: "We considered that Southern Water could afford to clear the scheme's deficit much more quickly without negatively impacting the company's growth prospects.

"We are clear that we will take action where we see substantial dividends with low scheme contributions and long recovery plans.

"Whilst we began an investigation using our section 231 funding power, in the end we did not have to fully exercise the power as we obtained a strong settlement ending uncertainty and avoiding a potentially lengthy litigation process."