TPR announces increased scrutiny of dividend payments

The Pensions Regulator’s annual funding statement included a warning that the Regulator will launch investigations where it believes an employer’s pension deficit contributions are too low, compared with its dividend payments.

2 June 2017

The Pensions Regulator recently published its annual funding statement for defined benefit pension schemes, in which it indicated that it would be likely to intervene where schemes “are not being treated fairly”.

The question of whether or not a scheme was being treated fairly is a subjective one and dependent on the particular circumstances, but the Regulator would be particularly concerned where:

  • recovery plans were being extended unnecessarily (e.g. where the employer can afford to increase contributions); or
  • where the employer covenant is constrained and total payments to shareholders (including dividends) are prioritised over contributions to the scheme.

The Regulator is clearly concerned about ensuring that schemes’ interests as creditors are properly recognised by employers – the Regulator expects trustees to “ensure that contributions to the scheme feature prominently in their employer’s considerations”, reflecting the scheme’s creditor status.

The Regulator also confirmed that, where an employer’s total distribution to shareholders exceeds its deficit reduction contributions, it would expect the scheme to have a “relatively short” recovery plan, underpinned by an investment strategy that “does not rely excessively on investment outperformance”. The Regulator does not set out what it would consider to be a relatively short recovery plan or excessive reliance on investment outperformance in this context however. 

Where a scheme does not meet the Regulator’s expectations, the Regulator will consider investigating to assess whether the levels of contributions being paid to the scheme are too low and whether the level of dividends/distributions suggests that the employer has greater affordability to increase its contributions. Where the Regulator believes this is the case it will “take steps to ensure that an appropriate balance is struck between the interests of the scheme and shareholders”. 

The Regulator clearly has the adverse publicity following the collapse of BHS in mind in highlighting its concerns in relation to what it sees as the prioritising of dividend payments over deficit recovery contributions. The statement is in high level terms and does not set out clear criteria which would trigger an investigation into a scheme by the Regulator, where distributions to shareholders had exceeded deficit recovery contributions. In such circumstances, trustees would need to be able to justify (including to the Regulator) why a recovery plan and associated investment strategy were appropriate, in the context of an integrated risk management approach to scheme funding.