The Pensions Regulator (TPR) believes that those governing defined benefit (DB) schemes could do more to deal with rising deficits and cut risk.
Low gilt yields have seen deficits grow and funding levels fall, yet the regulator said that this is manageable for 85% to 90% of DB scheme sponsors. However, the low-yield environment is impacting employers’ ability to maintain deficit repair contributions (DRCs).
Data released by the watchdog shows that the ratio of DRCs to dividend payments by FTSE 350 companies has declined to 7% from 10% in the four years to 2016.
TPR makes it clear that ensuring DB schemes are properly funded is a priority. So in this year’s annual funding statements it wants to see higher contributions, reduced risk and progress in securing legally-enforceable support from the parent. It also wants sponsors to be more flexible in how they fund their schemes.
TPR’s executive director for regulatory policy, Andrew Warwick-Thompson, said sponsoring companies must not only think of their shareholders.
“We are not against companies paying out dividends but employers must strike the right balance between the interests of the scheme and that of its shareholders,” he added.
The regulator could intervene if it sees a situation where a scheme is not being treated fairly. “If a company is paying out more in dividends than in deficit reduction contributions, we will expect to see a short recovery plan,” Warwick-Thompson added.
“And we will expect that recovery plan to be underpinned by an appropriate investment strategy.”
Lincoln Pensions chief executive Darren Redmayne would like to see more of a focus on reducing the risks that could see deficits widen.
“It is therefore concerning, but not surprising, that nearly four in 10 schemes are viewed by the pensions regulator as taking unnecessary longer-term risks,” he added.
Redmayne welcomes the TPR’s proactive stance on the equitable treatment of pension schemes and shareholders.
“Dividends are a necessary and normal part of corporate life but it appears that some companies have opted to take additional risk with their pensions and increase dividends disproportionately to fund their schemes,” he added.
“TPR has fired a warning salvo and we expect some corporate dividend decisions will come back to bite their directors and shareholders in the coming years.”
