This week has seen The Pensions Regulator published its annual funding for defined benefit (DB) scheme valuations aimed at both trustees and employers. The Annual Funding Statement is primarily aimed at those pension schemes that are undertaking valuations in the period of 22 September 2016 to 21 September 2017 but its results and findings are relevant to the trustees and employers of all defined benefit pension schemes.
In the report, The Pensions Regulator has warned that it will be taking a much tougher line on companies that are prioritising shareholder dividends over reducing their pension scheme deficits. It will be focusing on "fair treatment" when it reviews pension funding plans in the future and will be prepared to intervene if they believe that schemes are not being treated fairly in comparison to its shareholders.
The issue affects approximately 11 million people in the UK who are members of defined benefit schemes that rely on their employer for income. Nearly 6000 companies have these types of schemes and their pension deficits have increased to £530 billion due mainly to low interest rates inflating liabilities. In its report, The Pensions Regulator 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."
"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."
Shockingly, a recent report indicated that nearly 50% of pensions schemes of FTSE 500 companies could clear their pension deficit with the payment of just one year's dividends. According to Graham McLean, from Willis Towers Watson actuarial consultants, The Pensions Regulator has traditionally not used its full powers but now seems more prepared to flex its muscles. Talking to the FT he said:
"They are now signalling they are prepared to intervene in future, and today's funding statement does follow recent scrutiny of the regulator by a parliamentary select committee."