The Pensions Regulator threatens to investigate firms who prioritise paying dividends over funding pension schemes
News follows Conservative pledge to hand more powers to TPR in wake of the Philip Green BHS scandal
Half of FTSE 100 firms could clear pension deficits within two years by withholding dividends - only six companies are spending more in contributions to their DB pension schemes than in dividends to their shareholders*
On page 10 of its Annual Funding Statement issued today, the Pensions Regulator says:
“Trustees need to ensure that contributions to the scheme feature prominently in their employer’s considerations and that its legal obligations to the scheme as a creditor are recognised ahead of shareholders with no legal entitlement to dividends, but who may exert pressure on the employer to obtain them.
“We expect schemes where an employer’s total distribution to shareholders is higher than deficit reduction contributions being paid to the pension scheme to have a relatively short recovery plan and that the recovery plan is underpinned by an appropriate investment strategy that does not rely excessively on investment outperformance.
“Where this is not adhered to, we will consider opening an investigation to assess whether the levels of contributions being paid to the scheme are too low and whether the level of payments to shareholders suggests that the employer has greater affordability. Where we believe there is sufficient affordability to increase contributions to the scheme, we will take steps to ensure that an appropriate balance is struck between the interests of the scheme and shareholders by the employer.”
Tom Selby, senior analyst at AJ Bell, comments:
“The shadow of Philip Green and BHS looms large over The Pensions Regulator’s barely-disguised threat to companies paying out handsome dividends while failing to close gaping pension deficits. Clearly there is a balance to be struck here – dividends are the lifeblood of the UK economy, and a significant reduction in payouts would potentially have far-reaching consequences for investment and growth.
“However, company bosses have been put on notice that pension scheme members cannot be treated as second-class citizens when it comes to allocating resources. With Theresa May promising to beef up the powers of the regulator, firms sponsoring defined benefit schemes will now be braced for tougher scrutiny of how they prioritise spending.
“It is worth recognising that BHS was an extreme example of a company neglecting its pension scheme while paying out enormous dividends to Philip Green. Furthermore, defined benefit schemes have suffered collateral damage as the Government’s post-financial crisis bond buying splurge depressed gilt yields, causing deficits to spike.
“Ultimately the clampdown proposed by Theresa May coupled with the message from the regulator today will likely see more companies looking to sell their DB liabilities to insurance companies in order to get the risk off their balance sheet."
*Half of FTSE 100 firms could clear pension deficits with two years of dividend payments - https://www.jltemployeebenefits.com/media-centre/press-releases/jlt-releases-ftse100-report-dec-2016-16-jan-2017