TPR raises temperature on scheme funding

The Pensions Regulator has issued guidance to employers highlighting that pension schemes must not be disadvantaged in relation to other unsecured creditors.

The guidance also attempts to reassure employers that the current scheme funding regime is flexible enough to cope with the economic downturn. It points out that where a sponsor company is under pressure there is potential to renegotiate previously agreed plans to repair pension deficits.

But the TPR statement has been criticised as underlining the disincentives to invest in companies with final salary schemes, with Barnett Waddingham highlighting the vicious circle that downward pressure on company share prices has on scheme deficits.

A recent PwC pensions survey of 98 organisations, including 29 FTSE100 companies shows 81 per cent of all companies are concerned about the level of pension cash funding commitments and 69 per cent of FTSE100 companies are worried about the impact on dividends to shareholders.

David Norgrove, chairman of the Pensions Regulator says: “Trustees of pension schemes in deficit are unsecured creditors of their sponsoring employer. We are sensitive to the pressures many of these employers face in current economic conditions with falling asset prices and increasing deficits. There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency. But the pension scheme recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders.

“Any employer who believes that an existing recovery plan is at serious risk of jeopardising the company’s future health or solvency should discuss this with their pension scheme trustees, and we would encourage schemes and sponsors to talk to us if they have concerns.”

Paul Jayson, partner at Barnett Waddingham says: “Pension schemes are already a noose around the necks of companies. Today’s announcement is another disincentive to invest in companies with a pension scheme. Any investor is going to shy away from investing in a company with a defined benefit scheme if they see that their reward, the dividend, for committing to that company will not be forthcoming until the “hungry” pension scheme has been satisfied.

“The restriction on paying dividends to ease the funding burdens on employers may be counterproductive. Pension schemes are major investors in equities and hence whilst this restriction could lead to Scheme A’s funding not being reduced, it could hurt Scheme B due to lower returns on their investments, and indeed hurt Scheme A as an investor in other companies’ shares.

“The statement says that amending funding plans should be considered where there is “serious risk of jeopardising the company’s health or solvency”. Once again this is protecting the past with little thought to the future. This does not encourage companies to invest for the future which would increase employment and prosperity.”

Marc Hommel, partner and UK pensions leader at PricewaterhouseCoopers says: “Employers need to be far more assertive in helping trustees understand cash constraints. Trustees tend to ask for more than is affordable when the employer has not engaged them early or openly enough.”