New consent requirements for the payment of dividends by UK public companies?

The last week of October marked another interesting development in the increasing focus on the payment of dividends by companies which sponsor UK defined benefit pension plans (see my blog post from 4 July 2019 here). 

In recent weeks the Pension Schemes Bill went before the House of Lords for its first reading. The Pension Schemes Bill would significantly increase the powers of the Pensions Regulator (TPR) in relation to the funding of defined benefit pension schemes and to intervene in transactions affecting the employer sponsors of such schemes. Perhaps prompted by this, on 30 October 2019, Lord Balfe brought a separate private member’s bill before the House of Lords which, if it had passed into law, would have required that prior to paying any dividends, UK public companies would be required to first obtain the written approval of (i) the trustees of any pension scheme responsible for the pensions of current or former employees of the company and (ii) TPR. 

Due to the dissolution of UK parliament on 6 November as a result of the upcoming general election, this bill will now not progress any further. It does not reflect Government policy. However, its introduction is still significant. It highlights the increasing regulatory and political focus on the payment of dividends by companies that sponsor UK defined benefit pension plans. It is indicative of an appetite, in some quarters at least, to place greater controls on the payment of dividends.

It seems reasonable to expect that a reincarnation of this bill may be brought before the next session of Parliament, given that the Pension Schemes Bill, which is believed to have cross-party support, will itself need to be reintroduced in that session. If such provisions were introduced they could make it significantly harder for public companies to pay dividends. Pension scheme trustees would no doubt embrace the opportunity to negotiate for a share of the available cash to be paid to the scheme in return for their written approval.

TPR could also be expected to take a tough stance when it comes to giving its approval. In this year’s Annual Funding Statement, TPR expressed the view 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. TPR expects that 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.

For now it’s a case of “watch this space”, but the payment of dividends by companies that sponsor defined benefit pension schemes appears to be firmly set to stay on the regulatory and political agenda.