Regulator Warns Employers: Put Pensions Above Dividends

by Dr. Ros Altmann

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18 February 2009

Regulator Warns Employers: Put Pensions Above Dividends
Tensions between shareholders and pension liabilities rising

At last, trustees and pension scheme members have a strong voice on their side. The UK Pensions Regulator has just issued guidance to warn directors and shareholders of companies sponsoring final salary pension schemes that they cannot cut pension contributions to schemes in deficit, without cutting out dividends. This welcome move aims to reinforce the message that our pension regime should not be considered a soft touch. The Regulator is reinforcing the message that, although pension schemes are just unsecured creditors of a company, their status ranks ahead of shareholders, so companies must prioritise making up a pension deficit over paying dividends.

In the past, Government allowed employers to avoid taking their pension deficits sufficiently seriously – which led to 140,000 people losing some or all of their promised pension when their pension scheme failed. Many pensioners’ lives were shattered as a result.

As the credit crisis and falling stock markets have plunged most schemes into deficit, pension trustees have to demand more money from employers to make up the shortfall. The trustees need to know that the Regulator will help them stand up to employers and finance directors, who often feel their primary duty is to their shareholders.

Increasing tensions can be expected though 2009 between the interests of pension scheme members, and the demands of shareholders. Members are relying on their final salary scheme to pay them on retirement, but if the employer has not put in sufficient money, then the pensions may not be paid. That means that trustees must ensure a recovery plan is in place to overcome the pension deficit in a reasonable time frame. The Pension Protection Fund at least protects most of the pensions if the employer goes bust, but it relies on funds being as well funded as possible before insolvency.

Of course, shoring up the pension scheme will take away resources that could otherwise be ploughed into the business or paid out to shareholders, but the Regulator is indicating that pensions take precedence. This is a very delicate balance and is bound to cause controversy or resentment.

Perhaps understandably, many companies will express outrage that they have to shore up their pension scheme in such difficult times. But pension liabilities have often been treated as if they were somehow not ‘real’ because deficits only need to be made up over the very long term. The temptation has often been to put off the problem into the future. But having had years of contribution holidays and insufficient contributions, it is essential that firms put in more money now, rather than passing the problem onto future directors. Pension liabilities must not be considered ‘optional’ – they have members’ lives attached.

With the protection of the Pension Protection Fund and the Pensions Regulator, the outlook for pension scheme members’ benefits is far better than it was a few years ago, however, both the level and the uncertainty of the costs involved in running UK final salary schemes will mean more problems for companies in the coming years. Well done to the Regulator for recognising that it is vital to get as much money in as possible now. This battle is only just beginning, but at least lines have been drawn.

Dr. Ros Altmann
07799 404747

ENDS