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A tougher, quicker regulator – will employers change?

Phil Green Phil Green

Despite recent commentary from The Pensions Regulator regarding its desire to be ‘clearer, quicker, tougher’ in its interaction with trustees and employers, many trustees do not appear to believe that there will be any noticeable change in the attitude of sponsoring employers until the regulator shows its teeth and uses its power to set contributions.

At a recent presentation to our trustee clients, The Pensions Regulator summarised the main messages laid out in its recently published Annual Funding Statement1 (issued in April 2018), emphasising its intention to be "clearer about what we expect from trustees, quicker to act and tougher on those who fail to act in the interests of members".

The regulator’s message this year is particularly relevant given recent high-profile examples highlighting the minimal scheme funding levels provided by some large groups to their pension schemes while they maintain, and even increase, the level of dividends paid to their shareholders, sometimes irrespective of the company’s underlying financial position.

Dividends or deficit repair payments

The regulator has prepared analysis which highlights that the proportionality of annual deficit repair contributions to dividends has been falling over recent years, with employers paying an ever increasing part of their profits to shareholders rather than in settlement of their pension obligations. Whereas this is not a concern for scheme trustees when the sponsoring employer is successful and profitable, should its financial position weaken, the continued return of funds to shareholders rather than addressing creditor claims, including a scheme’s outstanding funding requirements, becomes increasingly questionable.

The regulator’s emphasis on being ‘clearer, quicker and tougher’ coincides with recent press commentary and abrasive Commons Select Committee narrative around the actions of Carillion’s directors in addressing the funding requirements of their respective pension schemes. Whether this has had, or will have, any long term impact on the manner in which pension schemes are funded is less clear.

A poll undertaken by a sample of our trustee clients, after the recent presentation from the regulator, highlighted the following:

  • Although the majority of those present thought it was too early to tell whether the reporting of the recent high profile cases in the press would have any material impact on the manner in which employers fund their pension schemes, over a quarter thought there would be no change at all in the longer term.
  • Nearly half of those present did, however, believe that the regulator has changed its attitude and actions following the reporting of these cases with the introduction of the ‘clearer, quicker, tougher’ regime, albeit a slightly smaller percentage considered that more time was required to judge.
  • Finally, whereas nearly three quarters of those surveyed believed that employers would not change their dividend policies to increase funding into their respective pension schemes, almost everyone expected that they would if the regulator used its powers.

Gilts plus

On other matters of interest, the debate as to the methodology to be used to value a scheme’s liabilities continues, with c.65% concluding that the ‘gilts plus’ approach may not be an appropriate method. Views on which alternative basis should be used were less clear.

Finally, even before the DWP launched its consultation on a trustee’s legal duty to take account of Environmental, Social and Governance (ESG) factors, nearly a third of our survey confirmed that they have already been looking to change their respective underlying investment strategy to take account of these risks.

Can the regulator be clearer, quicker and tougher?

It is clear from recent coverage in the press, and from the regulator’s own analysis, that the gap between the level of deficit repair contributions paid to schemes and the level of dividends returned to shareholders is increasing, suggesting that employers are preferring shareholders over pension scheme members. 

This, together with the fallout from recent high profile transactions, including BHS and Carillion, the potential legislative changes arising from the government’s white paper, and more practical concerns due to the ongoing issues in the retail sector, means that scrutiny of the actions of the regulator will continue into the future.

The direct comparison between the size of dividends and deficit recovery payments, in any year in isolation, takes no account of the situation of the defined benefit pension scheme, its funding needs nor the size of the employer. It could, therefore, be argued that it is a rather crude measure by which to judge the degree of support given to scheme by its employer(s). Nonetheless, it is a comparison that can be easily calculated and has brought the whole issue of an employer’s support for its pension scheme to life which, for trustees and members, must be a positive step.

Although many trustees remain sceptical, believing that some employers will not alter their attitudes to funding their pension schemes without some form of regulatory intervention, we consider that the regulator’s desire to be ‘clearer, quicker, tougher’ in its interactions with trustees and employers will provide the impetus needed to focus employers on the funding positions of their pension schemes, as well as the needs of their shareholders.

But this will not occur overnight and trustees need to remain firm in their funding discussions with their respective employers, taking robust advice and not be afraid to seek the support of the regulator if needed.

For more information, or to have a discussion please contact Phil Green.

References

  1. The Pensions Regulator - Annual funding statement analysis, 2018

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