Pensions - Articles - Renewed focus on dividend versus deficit reduction debate

Support for FTSE 350 defined benefit (DB) pension schemes remains largely unchanged over the last year although PwC data has highlighted a polarisation across the schemes.

 PwC’s 2019 Pension Support Index (PSI) tracks the relationship between the financial strength of the FTSE 350 companies and the size of DB pension scheme commitments, rating the overall level of employer support offered to these schemes. This year’s score of 87 remains unchanged from the end of 2017, when covenant strength returned to pre-recession levels for the first time since the financial crisis. While more than half (55%) of schemes are showing very strong levels of support, the rest are evenly distributed across the index from strong to weak. 

 This year’s index considers the continued evolution of pensions policy and increased intervention from the Pensions Regulator (TPR). It details how TPR is encouraging a stronger negotiation stance from Trustees than previously and is encouraging pension scheme trustees to adopt a ‘bank-style’ approach when protecting the rights of workers.

 Schemes with very strong scores are able to pay off their self-sufficiency deficit within one year of their dividend run-rate, the index says. This raises the question of how much corporate cash should be paid into a pension scheme as opposed to dividend payments to shareholders, as for these companies making good pension promises is now a matter of choice rather than an affordability restraint.

 Jonathon Land, head of PwC’s Pensions Credit Advisory practice, said: “Regardless of where a scheme sits on the PSI scale, TPR is being more proactive and expecting strong employers to pay off their deficit faster, whilst weaker employers should be protecting and enhancing covenant strength. The coming 12 months will see a renewed focus on the question of how company cash should be split between shareholders and the pension scheme. 

 “The high level of restructuring activity over the last year, in particular in the retail sector, has on many occasions involved schemes with covenant scores towards the weaker end. The focus for trustees in these situations is to look to maintain the covenant through the restructuring, and strengthen it if possible.

 “Whether corporate or trustee, the Pensions Support Index score should heavily influence pension strategy. The days of TPR acting as a referee rather than a player are over and we can expect to see pension creditors behaving more like financial lenders.”

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