The regulator has reiterated warnings that it will intervene should it find evidence of companies prioritising shareholders over the financial health of their pension schemes.
Andrew Warwick-Thompson, executive director for regulatory policy, described the findings as "disappointing".
"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 said.
"Having made our expectations so clear in this year's [annual funding statement], if we see a situation where we believe a scheme is not being treated fairly, we are likely to intervene. For example, if a company is paying out more in dividends than in deficit reduction contributions, we will expect to see a short recovery plan. And we will expect that recovery plan to be underpinned by an appropriate investment strategy," he said.
Among FTSE 350 companies who are 'Tranche 12' schemes, meaning those due for revaluation between 22 September 2016 and 21 September 2017, the ratio of deficit reduction contributions (DRCs) to dividends fell from around 10% to around 7%, according to analysis by the regulator (36-page / 853 KB PDF). It found that this was "mainly driven by the significant increase in dividends over the period, without a similar increase in contributions".
Overall, schemes falling within Tranche 12 have experienced increased deficits since their 2014 valuations, due to a significant change in market conditions over the course of the reporting period, the regulator said. However, around 50% of the schemes covered by the report have the resilience to either maintain or increase their current deficit reduction plans, while a further 37% should be able to improve their recovery rate by reducing longer term risks, according to the report.
"It is encouraging that 85% to 90% of schemes currently preparing their valuations have employers with sufficient financial resilience to be able to afford to manage their deficits, and don't have a long term sustainability challenge. But it is clear that tough market conditions have led to a significant jump in deficits for this tranche of schemes despite their relatively stronger position three years ago," said Warwick-Thompson.
"Ensuring DB [defined benefit] schemes are properly funded is a key priority for us and so our annual funding statement this year takes a more directive approach than in previous years. We have been clear in what our expectations are; where we expect higher contributions into a scheme, and where we expect a scheme to reduce risk to an appropriate level and/or to seek legally enforceable support from its group or parent company. We also want more schemes and sponsors to make use of the flexibilities within the funding framework," he said.
"Employers are having to decide how to prioritise the competing demands of shareholders and pension schemes for their money," said pensions law expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com. "The regulator clearly thinks they're favouring shareholders too much."
"The Conservatives, set to form the next government, pledged in their manifesto to hold to account company bosses who put pension schemes at risk by their actions. While they have lost their overall majority, it's hard to imagine any of the opposition parties vetoing such a measure. The authorities are breathing down the necks of directors harder on pensions. Life looks set to become still more complicated for them," he said.
In its election manifesto, the Conservative party pledged to consider the introduction of a new criminal offence for company directors who "deliberately or recklessly put at risk the ability of a pension scheme to meet its obligations". It also proposed new powers to allow The Pensions Regulator to take action against those who mis-manage pension schemes, including new fining powers and the right to scrutinise, impose conditions on or prevent mergers and takeovers that threaten the solvency of a corporate pension schemes.