Blow to investors as TPR rules risk further dividend drought

During the coronavirus crisis, pension schemes have allowed companies facing a cash flow crisis to suspend deficit repair contributions to defined benefit schemes as long as other outgoings – such as dividend payments – are also suspended.

But guidelines published by the regulator on Monday said companies that had paused pension payments should pay back the deferred costs before paying dividends to shareholders again.

The document requires “all dividends and other forms of shareholder distribution to stop throughout the period of suspension and not to start again until the deferred or suspended contributions have been paid”.

The statement was included in a list of suggested mitigations trustees could ask for when faced with a request for further delayed contributions.

Consultancy LCP said if trustees insisted dividends could not restart until all the suspended contributions had been reinstated – rather than potentially paid back over a period of years – it could “significantly delay” when companies start to pay dividends again.

TPR confirmed this week that around 10 per cent of all schemes had so far agreed to defer contributions, which according to LCP suggested more than 500 schemes were postponing payments already.

Shayala McRae, senior consultant at LCP, said: “Most companies have understood that if they want to ease off on contributions into their pension scheme, they have to hold off on paying dividends for now.

“But these new guidelines will encourage trustees to go further. Those who follow these suggestions will ask employers to make sure that all the missing pension contributions are made good before any dividends can be paid.

“This could lead to a significantly longer dividend drought for many shareholders.”

The news would be a further blow to income investors, who are facing at least a multibillion-pound dividend shortfall this year as companies scrapped payouts to shareholders amid the crisis.

Banks and insurers were forced to suspend payments by the Bank of England as the central bank looked to ensure such companies maintained a cash buffer throughout the crisis.

The government then blocked large businesses borrowing cash from the government to support themselves through the coronavirus crisis from paying out dividends to shareholders.

In the guidance, TPR also said trustees must report any delays in DB transfers from next month as activities begin to return to normal levels.

It also confirmed the extension of the period in which schemes must report payment failures would remain in place until September to give trustees and providers more time to work with employers to bring payments up to date.

This article originally appeared on ftadviser.com