Southern Water has agreed higher deficit repair contributions after an investigation carried out by the Pensions Regulator. The case demonstrates how the watchdog is taking action to ensure schemes are treated fairly, says Nicola Parish, executive director of frontline regulation.
While we are not against the payment of dividends, we have ongoing concerns about the disparity between dividend growth and stable DRCs.
This is not the first time we have intervened in this way because we were unhappy that a scheme was being treated unfairly in comparison with shareholders
There have been corporate failures that have highlighted the risk of long recovery plans when payments to shareholders are excessive in relation to DRCs.
Clear expectations
In this year’s annual funding statement we were clearer about our expectations of how trustees should approach their scheme valuations, including negotiating robustly with their sponsoring employer to secure a fair deal for the pension scheme.
We are working more closely with trustees to support them as they seek to right the balance of the interests of pension savers against returns to shareholders and investors. And we are clear we will use our powers where the balance is not right. We expect strong employers with higher dividends than DRCs to have short recovery plans and weaker employers to prioritise scheme liabilities over shareholder returns.
In the case of Southern Water, we felt there was an imbalance between the funds being paid into the pension scheme and the £190m paid in dividends to shareholders in 2016 and 2017. Ultimately, we believed the scheme was being treated unfairly and that Southern Water could afford to clear the scheme’s deficit much more quickly, without impacting on the company’s growth.
As part of our regulatory proceedings, we issued a warning notice to the trustee and company to say we were looking to exercise our section 231 funding power, which would enable us to impose a schedule of contributions.
When dividend payments were made by Southern Water, we then also opened an anti-avoidance case.
A good outcome for members
Our investigation and the subsequent settlement means more money will now be paid into the pension scheme over a shorter period – £50m more will go into the scheme, initial payments will be up to twice as much as originally proposed, and every subsequent payment will also be higher.
Southern Water has also now introduced a dividend sharing mechanism, which means that if dividends are paid to shareholders above a certain threshold, the company will increase the amount it pays into the pension. It means any success of the company will be shared more fairly with the pension scheme as well as shareholders.
This is a good outcome for the scheme’s 4,000 members to address the scheme’s ongoing deficit, which was £252m at the date of its last triennial valuation at the end of March 2016.
We are pleased our concerns have been taken on board by both Southern Water and the scheme trustees, and we are happy with the strong outcome which has been agreed. In the end we managed to reach this conclusion without fully exercising our power, ending uncertainty and avoiding a lengthy litigation process.
We do not publicise every case we investigate. But this is not the first time we have intervened in this way because we were unhappy that a scheme was being treated unfairly in comparison with shareholders.
Companies should be clear that we will take action where we see substantial dividends with low scheme contributions and long recovery plans.
Nicola Parish is executive director of frontline regulation at the Pensions Regulator
