The Pensions Regulator (TPR) has fired a warning shot at trustees and employers who focus on dividend growth rather than paying down defined benefit (DB) deficits.
Defined benefit pension scheme trustees and employers have been told by The Pensions Regulator to agree a clear strategy for achieving their long term goals.
In the regulator's annual funding statement, published today (March 5), the watchdog went one step further than it did a year ago when it warned about dividends being ‘disproportionate’ to deficit recovery payments.
The 2019 statement calls for a strong plan to sort out the deficit in any case where dividends ‘exceed’ deficit recovery payments – a much more specific guideline.
Trustees were told by the watchdog they should be mindful of the additional deficit that could arise from their chosen investment strategy and whether their covenant could support it.
For the first time, following feedback from trustees and advisers, the regulator also spelt out their expectations on investment strategies.
Since the majority of schemes are closed to new members, The Pensions Regulator expects scheme maturity issues to assume greater significance for setting funding and investment strategies in the future.
David Fairs, executive director of regulatory policy, analysis and advice at The Pensions Regulator, said: "We have taken a tough stance on schemes that have not been treated fairly and will continue this approach where members’ benefits are under pressure."
Tom Selby, senior analyst at AJ Bell, said The Pensions Regulator has got its sights set on companies who flagrantly ignore their responsibilities to pension scheme members in favour of rewarding shareholders.
He said: "The regulator's approach is one of hard-nosed pragmatism. While understandably it wants deficits to be plugged as soon as is possible, coming down like a tonne of bricks on strong companies by restricting their ability to reward shareholders would risk strangling economic growth.
"It could also prove counterproductive if this led to a collapse in vital investment and thus weakened the company ultimately responsible for paying pensions. In this sense the regulator is performing something of a pensions high-wire act.
"For investors, the regulator’s tough stance re-emphasises the importance of assessing all factors that could potentially affect a company’s long-term growth, including any pension liabilities."
Steve Webb, director of policy at Royal London, said one of the most striking features of the new statement was the tougher language around companies paying large dividends when their pension scheme is in significant deficit.
He said: "Pension scheme members are understandably concerned when their pension scheme is well short of the money needed to pay their pensions if they see large amounts of money going out of the business in dividends.
"While there is nothing wrong in companies paying dividends, it is good to see the regulator putting greater pressure on firms to make sure that sorting out the hole in the pension scheme gets the attention it deserves.
"There have been too many cases recently where firms seemed able to afford large dividends and then went out of business leaving the pension scheme starved of cash."
Fiona Tait, technical director at Intelligent Pensions, said following the high profile failures of schemes such as BHS and Carillion she often has to reassure members of defined benefits schemes who are concerned about the solvency of their schemes.
Ms Tait said: "These guidelines offer a bit more comfort that trustees have the scheme's long term solvency in mind and members are more likely to receive their promised benefits, even if this is some time off.
"The fact that one of The Pension Regulator's goal is to reduce dependency on the employer is also very helpful since it is not always easy for employees or their advisers to assess the strength of the employer covenant."
emma.hughes@ft.com
