Companies told to put pensions before dividends
The Pensions Regulator has said that if dividend payments exceed deficit reduction contributions to a scheme, it will look more closely at whether the employer can afford to – and should – pay higher contributions. “Most employers will already consider the impact of paying dividends on their Defined Benefit (DB) pension scheme but they may not focus on the relative size of the payments when assessing whether to proceed or not,” warns Vikki Massarano, Partner, ARC Pensions Law (www.arcpensionslaw.com).
“One of the difficulties for employers is how changes in their scheme’s funding level will affect the Regulator’s view of historic dividend payments. The Regulator’s statement acknowledges that funding deficits are likely to be greater than was projected at the last valuation; one consequence may be that employers look for schemes to reduce potential funding volatility by changing investment strategy,” continued Massarano.
“Trustees could find themselves in the difficult position of being notified in advance of a dividend payment and being asked to “bless” that payment, which they might be comfortable with now but may be unlikely to be willing to do in future. A defined benefit pension scheme – sometimes called a final salary pension scheme are advantageous for members because the scheme takes all the investment risk and is obliged to meet the 'pension promise' of a pre-defined amount of income made to each member, regardless of how underlying investments have performed. This means final salary pension schemes are riskier for employers. "
Final salary pension schemes are also becoming more expensive as people live longer, because they have to pay out for longer. For these reasons, most private sector schemes have now been closed to new members and replaced by defined contribution schemes.