Pensions trustees urged to beware dividends and ‘excessive’ bonuses

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.

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