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Could the 2021 “dividend bubble” burst in weeks?

Analysis from Lane Clark & Peacock (LCP) indicates the new powers of the Pensions Regulator (‘TPR’) could cause the dividend growth rate to slow.

After dividend levels were depressed during the Pandemic, the first half of 2021 has seen a recovery in payouts, with some high-profile firms announcing large dividends in recent months. Whereas dividends paid by FTSE 100 companies dropped from around £110bn in 2019 to just over £70bn in 2020, announcements so far in 2021 suggest much of that fall could be recovered this year. And there have been similar positive noises from companies outside of the FTSE100 regarding the level of proposed dividend payouts.

However, analysis by consultants LCP suggests that the pace of recovery in dividends could be slowed as a result of increased powers for the Pensions Regulator which are due to come into force from 1st October 2021.

These new powers will beef up TPR’s scrutiny of shareholder dividends (and other forms of ‘covenant leakage’, including executive remuneration) to a new level for corporates which sponsor Defined Benefit pension schemes. This will impact all sponsors of DB schemes, not just the largest FTSE 100 blue chips whose dividend announcements make it into the news around this time of year.

The new powers for TPR have come about as a result of the Pension Schemes Act 2021, which was designed to strengthen the rules around the funding of company pension schemes in the wake of high-profile cases such as BHS and Carillion.

Under the new rules, company directors and others involved could face a legal challenge if a dividend payment leads to a ‘material reduction’ in the recovery that a DB pension scheme can expect to get in the event of a hypothetical insolvency.

According to LCP, where directors of companies with a DB scheme wish to pay dividends, and where the DB pension scheme has a deficit, directors will wish to analyse the impact of dividends on the DB scheme at an early stage of discussions.

These new rules will be relevant for all corporates which sponsor DB pension schemes, not just the largest FTSE 100 blue chips. And is relevant for intra group and special dividends, as well as ongoing ‘regular’ dividends paid out to investors.

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