Companies will have to build in the impact on their pension scheme in their dividend discussions. This will demonstrate that the DB pension scheme was considered as part of the directors’ decision making (should TPR come knocking in the future) and also sets out the basis for conclusions on whether any mitigating measures could be appropriate to manage the risk of regulatory intervention for a dividend. Such regulatory intervention could include the requirement for the sponsor, or director, to make a one-off cash payment to the Scheme (a ‘Contribution Notice’).
There are two important features of the new law which mean that even robust employers with a pension fund surplus in their accounts cannot afford to ignore it:
- The test applies to companies whose DB pension scheme is in deficit relative to the cost of buying out all its liabilities with an insurance company; this is a tougher measure than the deficit measure used in company accounts and can mean that a scheme which shows a surplus in the accounts can still be caught by the new rules.
- The test applies *if* the company were to go bust, and is not based on the likelihood of this happening; if a dividend makes it less likely that a deficit would be covered *if* the company went bust, then action could still be taken by TPR even if the company was widely regarded as being in good health;
Whilst firms with a DB scheme deficit will not be banned from paying substantial dividends, they may in some cases be expected to take other mitigating measures to provide security to the pension scheme (such as giving the pension scheme priority claim on certain company assets). Alternatively, they may decide to pay a lower dividend in order to avoid a ‘material’ risk to the pension scheme’s position, and to manage the risk of regulatory intervention.
Finally, it is worth noting that the impact of the new powers for the Regulator extends beyond companies’ dividend policies and all company boards will now have to document how they considered the pension scheme impact across a wide range of corporate decisions (including refinancing and Group restructuring).
Commenting, Laura Amin, principal at LCP said:
“Government and regulators are keen to avoid a repeat of scenarios where a company goes bust leaving a hole in the pension scheme after a period when large dividends have been paid to shareholders. The new powers for The Pensions Regulator (‘TPR’) may lead to more frequent regulatory intervention. We expect the new powers to generate much debate when they come into force from 1 October and it may be challenging for company directors to understand where the new boundaries lie. At the very least, company boards will have to think much more carefully when setting their dividends about the impact on the position of their pension scheme, whilst schemes will be in a stronger position to press for greater security if a large dividend payment goes ahead. Depending on how companies react, we could see the 2021 ‘dividend bubble’ burst in a matter of weeks”.
