Out-Law News 2 min. read

Pensions Regulator 'could investigate' employers who prioritise dividends over pension deficits


Companies that prioritise paying dividends to shareholders over addressing defined benefit (DB) pension scheme deficits could face investigation by the regulator, The Pensions Regulator has warned.

Large dividend payments to shareholders could be seen as evidence that the employer has "greater affordability" and could be increasing their contributions to their pension scheme, The Pensions Regulator said in its annual funding statement (12-page / 104KB PDF). This document sets out the regulator's view of some of the main issues facing trustees and sponsoring employers where the scheme's three-year revaluation is due in 2017.

The Pensions Regulator said that its focus was on "fair treatment" for pension schemes and their members.

"We are likely to intervene where we believe schemes are not being treated fairly," it said.

"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," it said.

In its statement, The Pensions Regulator reminded trustees of the employer's "legal obligations" to the scheme as a creditor. Shareholders, on the other hand, have "no legal entitlement to dividends, but ... may exert pressure on the employer to obtain them", it said.

"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," it said.

Separately, the regulator said that most schemes could expect to see an increase in their liabilities over the past three years, driven by low bond market yields and generally poor economic conditions. Schemes that had hedged their interest rate risks could expect to fare better than those that had not, while those who now found themselves in a worse funding position than anticipated should "[take] appropriate action to recover their funding position and to mitigate against any further downside events", the regulator said.

However, it said that the majority of schemes had sponsoring employers "with the ability to manage their deficits", and currently had no long-term sustainability issues. Only 5% of schemes had employers that were "tending to weak, or weak", that were "at risk of becoming unable to, or are unlikely to be able to adequately support the scheme", it said.

"The relationship between dividend payments and deficit contributions has been under the regulator's eye for some time now and is already monitored by many trustee boards and employers," said pensions law expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com.

"Whilst seeking to strike an appropriate balance is nothing new, it is helpful of the regulator to set out its expectations. This is consistent with its aim of giving clearer guidance about what it expects from trustees and employers in the future," he said.

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