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Freshfields Risk & Compliance

| 3 minutes read

Growing regulatory pressure in the UK to limit dividend payments

When it comes to the payment of dividends the UK Pensions Regulator (TPR) is increasingly focused on what it considers to be “equity of treatment” between shareholders and defined benefit pension schemes. We have recently seen a number of high profile insolvencies where pension schemes have been seriously underfunded despite significant dividends having been paid. Against this backdrop, and coupled with increasing parliamentary and press scrutiny of pensions issues, companies that sponsor UK defined benefit pension schemes need to carefully consider the position of their schemes before making any dividend payments. 

This year’s TPR Annual Funding Statement paid particular attention to the ratio of dividends paid out of a sponsoring employer vs. deficit repair contributions paid in to pension schemes. TPR’s stance is that where dividends and other shareholder distributions exceed deficit repair contributions it expects a strong funding target and for recovery plans to be relatively short. Employers with a covenant rating of weak, or tending to weak, should normally pay more to their pension schemes than to their shareholders, whilst companies that are not able to support their schemes should in TPR’s view not be paying dividends at all. In cases where it is appropriate to pay more in dividends than in deficit repair contributions, TPR states that it expects a strong funding target and short deficit recovery period.

This is not just regulatory rhetoric, we are seeing increased regulatory action in practice too.

TPR has statutory moral hazard powers, including the power to make third parties liable for pension deficits, funding etc. in certain circumstances. The payment of a dividend can be a trigger for TPR to consider using these powers against a company that is connected or associated with a participating employer in a pension scheme. The payment of a dividend could in itself be sufficient to justify the use of TPR’s powers where it has a material adverse effect on support for the pension scheme. In addition, the payment of a dividend can reinforce the connection between a sponsoring company and a parent, making it more reasonable for the parent to be the target of TPR’s powers. 

The threat of these powers being used as a result of dividend payments is driving companies to put in place additional support for their pension schemes. For example, in the face of regulatory action, a large utilities company has recently agreed to pay significantly higher deficit recovery contributions, shorten the period over which the scheme’s deficit would be eliminated and put in place a dividend-sharing mechanism to ensure the fair treatment of the pension scheme and its members. Separately, TPR has announced that following its intervention, an unnamed company had agreed to make an upfront contribution to its pension scheme, reduce the recovery plan, agree additional deficit repair contributions and committed to stop dividend payments for six years. 

TPR has also begun making proactive contact with the trustees of pension schemes where the employers have paid more in dividends than in deficit repair contributions to tell them that they are expected to seek an increase in deficit repair contributions or a reduction in the period over which the scheme’s deficit will be eliminated. As a result, pension scheme trustees are pushing harder on the issue of dividends and deficit repair contributions in upcoming valuations. 

Parent companies of sponsoring employers also need to think carefully about the payment of dividends as pension schemes may have an interest in the strength of the parent for a number of reasons. 

We’re expecting further developments on this in the coming months as TPR remains on course to adopt a new funding Code of Practice later this year, following wider consultations on options for a revised funding framework. In addition, the government continues to review the UK’s dividend regime, including consideration of the ways in which directors could provide stronger reassurances that dividends will not undermine the affordability of deficit repair contributions. In the meantime, companies should be mindful of the risks of paying dividends without ensuring there is adequate support in place for their UK pension schemes.


pensions law, defined benefit schemes, dividends