Companies hard hit by Covid-19 may have to put dividends on hold if they are facing a cash squeeze but have large pension shortfalls, the UK regulator has warned.
David Fairs, executive director of regulatory policy with the Pensions Regulator, said retirement schemes should “not be the only creditor feeling the pain” if a company is struggling to recover from the impact of the pandemic.
The regulator has made concessions during the coronavirus crisis to businesses sponsoring defined benefit retirement schemes, where the employer is liable for any shortfall in plan funding for pension promises.
About 200 employers sponsoring the country’s 5,500 DB plans have taken advantage of regulatory easements to defer, or reduce, their scheduled pension contributions since April last year.
As the government looks to wind down Covid-19 business support, Fairs said trustees should continue to “work closely” with employers that were struggling to pay contributions, but they should ensure that the scheme is treated fairly compared with other stakeholders such as banks or investors.
“Trustees should consider very carefully any [further] request to lower contributions,” said Fairs, speaking at the Pensions Expert industry webinar on DB funding, held this week.
“We expect any request to be short term and we want to see higher contributions in subsequent years.”
Fairs added trustees should ensure that the pension scheme was not bearing all the pain of a business in trouble.
“Dividends may need to be put on hold,” he said.
Fairs’ comments come as dividend payments have resumed at some of the country’s largest listed companies after the Bank of England acted last year to halt shareholder payouts at the biggest lenders, during the pandemic.
According to data from Sharepad, just under half of the FTSE 100’s current crop carries a pension deficit of some kind, ranging from a few million pounds to multibillions at seven firms — Shell, BT, BAE Systems, GlaxoSmithKline, AstraZeneca, Phoenix Group and Tesco.
Of those seven, six paid dividends relating to their 2020 financial year according to AJ Bell, the investment platform.
Shell, BP and GSK have already declared or paid dividends for the first quarter of 2021, added AJ Bell.
“The Pensions Regulator’s call for companies to avoid dividend payments if they are still recovering from Covid-19 and have pension obligations could affect the boardroom’s willingness to sanction dividend payments, for fear of public or regulatory backlash,” said Russ Mould, investment director at AJ Bell.
“However, the caveat ‘if they are still recovering from Covid’ could provide a good degree of wriggle room.”