London-listed firms can expect growing regulatory pressure to prioritise pension scheme funding over incentives to shareholders, The Pensions Regulator (TPR) has warned.
TPR revealed in its Compliance and Enforcement Bulletin that it has recently targeted a defined benefit (DB) scheme with poor funding levels, pressuring the sponsor to cut dividend payments for six years, reduce the recovery plan schedule from 13 to seven years, make a £10m upfront payment as well as annual deficit recovery payments totalling £3.7m.
“We have clearly set out our expectations for all workplace pension schemes and we will continue to intervene where we have concerns that a DB scheme is not being treated fairly by an employer,” says Nicola Parish, executive director of frontline regulation at TPR.
The regulator’s increased focus on corporate governance follows the high-profile cases of schemes collapsing, including the Carillion Pension Scheme and BHS. In each case, ailing companies continued to return cash to shareholders whilst systematically underfunding their retirement plans.
At the time of its collapse, Carillion’s pension deficit was at £587m, yet the firm had paid £376m in dividends to shareholders in the five years preceding its default.
The problem appears to extend far beyond the case of a few rotten apples. Over the past year, only five FTSE 100 firms paid more into their final salary scheme than they handed back to their investors.
While a number of UK blue chip companies have recently cut their dividend, their overall shareholder payment still drastically exceed pension scheme contributions.
Examples of those prioritising shareholders over retirement savers include Vodafone. The telecommunication giant recently announced a 40% dividend cut whilst having stepped up its scheme funding with a £243m contribution across two schemes in 2017. However, over the past year it paid more than €4bn (£3.5bn) in dividends to shareholders.
Marks and Spencer has also slashed its shareholder incentives by 40%. And while the high street retail giant has committed to just under £60m in additional contributions over the past two years, the amount is dwarfed by the more than £300m it has allocated for its investors in the past two years.