Pensions and Investment Research Consultants (PIRC) believes that a growing number of companies are at risk of paying out an illegal dividend to shareholders if they fail to apply the requirements of the UK Companies Act 2006 correctly.
The claim comes after it emerged in December that Domino’s Pizza had paid out almost £85m in illegal distributions, including a payment to the company’s employee benefits trust. The distributions spanned a period of 17 years.
Tim Bush, head of governance and financial analysis at PIRC, told IPE: “If a company subsidiary that supplies a large part of the group dividend sits below one with a pension fund deficit, then that dividend may well be trapped, as the pension fund has first claim on those profits.”
He added that PIRC – which has been locked in a long-running battle with the UK’s Financial Reporting Council (FRC) over the law regarding distributions – welcomed the analysis of the issue provided by Domino’s legal advisers, Norton Rose.
Bush said: “It is also good to see that where there is a problem the lawyers are explaining the issue regarding the accounts clearly. There has been no need to dispute the lawyers on that. Their analysis is entirely consistent with the position of Mr Bompas QC.”
Alongside failures to apply the law on distributions correctly, both PIRC and other pensions advisers have warned over the past year that companies could face a dividend crunch through burgeoning pension deficits.
Together with the issue of a simple lack of profits to distribute, companies might also find that a poorly structured pension fund leaves them with cash trapped within the group structure.
A trio of top City lawyers told IPE last year that the question of dividend payments was a minefield.
Meanwhile, a fresh skirmish has broken out between PIRC and the FRC regarding whether or not there is a specific duty for companies to report their compliance with section 172 of the Companies Act 2006.
Section 172 requires company directors to act in the best interests of the success of their company. It says a director must “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”
The FRC told IPE in a statement that it needs additional powers to police compliance.
In evidence to the UK parliament, the watchdog’s chief executive Stephen Haddrill said a change in the law would reinvigorate section 172.
Elsewhere, the European Financial Reporting Advisory Group (EFRAG) has issued a call for pensions professionals to staff a working party on accounting for so-called hybrid pension plans.
PensionsEurope told IPE it was keen to take part in the project and urged EFRAG to ensure that the process was transparent.
“We hope that EFRAG will accept candidates that represent PensionsEurope’s members in the Advisory Panel,” a spokesperson said.
Applications are open until 20 February.