Retirement fund trustees must be alert to companies paying out dividends and “excessive” bonuses if this weakens financial support for company pension schemes, the industry regulator has warned.
In a statement published on Thursday, the Pensions Regulator said trustees of the UK’s 5,500 defined benefit pension plans should be supportive of employers facing financial pressures and struggling to meet their pension payments because of the coronavirus pandemic.
However, it added that they should be “vigilant” for actions that could dilute cash flow to retirement schemes, such as the payment of dividends or “excessive” bonuses.
“Ongoing employer support is vital to trustees achieving their objectives, and trustees should be supportive of employers under financial pressures, in line with their duties to savers,” TPR said in its annual funding statement for DB schemes. “However, they should be vigilant of employer covenant leakage, which reduces the ability of the employer to support the scheme.”
Covenant leakage refers to ways in which cash available for the pension scheme may be reduced, such as through intercompany lending arrangements, the transfer of business assets, and the payment of royalties and management fees.
“Where trustees consider covenant leakage is not justified, we expect them to seek suitable protections to compensate their scheme for the resulting deterioration in covenant, particularly where there are weaker covenants and longer recovery plans,” TPR said.
Up to £1bn in pension contributions could be suspended this year as businesses strike deals with trustees to keep afloat during the crisis, according to a recent Financial Times survey of pension consultants advising more than half of DB pension schemes in the UK.
Meanwhile, the pandemic has focused attention on how companies use their cash, with many groups temporarily cutting executive pay and dividends coming under greater scrutiny.
“What is clear is that Covid-19 is testing employers and trustees like never before and it is vital that they work together collaboratively,” said Charles Counsell, chief executive of TPR. “We are clear that the best support for a pension scheme is a strong employer and so we are here to support both groups in our role to ensure savers’ retirements are protected.”
TPR’s statement came just weeks after emergency Covid-19 guidance issued by the body gave breathing space for employers to suspend their pension payments for up to three months, on condition there were no dividends or other shareholder payouts.
“While not being a panacea, the regulator’s guidance to pension schemes is a good checklist of the issues that are arising now and what the expectation is in terms of a good response to the crisis and funding levels,” said Alison Stewart, a professional trustee at Dalriada Trustees.