The UK’s Pensions Regulator (TPR) has put pressure on dividend-paying companies to ensure a balance between cash paid to shareholders and contributions to pension schemes, according to Willis Towers Watson.

TPR yesterday issued its annual report on defined benefit (DB) pension scheme funding. In it, the regulator said it expected schemes “where an employer’s total distribution to shareholders is higher than deficit reduction contributions being paid to the pension scheme to have a relatively short recovery period”.

The regulator did not give specific details of what would constitute a “short” period, but Graham McLean, head of pension scheme funding at Willis Towers Watson, said it was clear TPR wanted some companies to pay “a lot more” into their schemes.

“Last year, the regulator said that the median FTSE 350 employer was paying 10 times as much in dividends as in pension deficit payments,” McLean said. “A one-to-one ratio would often be a huge change – though, for some employers, a smaller increase in deficit payments might make the recovery period short enough to get the regulator off their back.”

TPR was criticised last year by politicians on the cross-party Work and Pensions Committee, who highlighted a 23-year recovery period for the BHS Pension Scheme as unacceptably long.

TPR chief executive Lesley Titcomb emphasised to the committee that this was an outlier, with the average recovery period across UK schemes closer to eight years.

Willis Towers Watson’s McLean said the regulator could have turned the spotlight on the balance between dividends and DB contributions as “plans to repair deficits are generally not on course”.

“Previously, the regulator has been warned that demanding more money for the pension scheme would stop employers from investing in their businesses,” McLean said.

“It is trying to reframe the debate from ‘pay off the pension deficit instead of investing in the business’ to ‘pay off the pension deficit instead of returning funds to shareholders’,” he added. ”It makes sense for trustees to look at contributions alongside cash leaving the business, but a dramatic change in dividend policy could raise an employer’s cost of capital and weaken its business.

“While the regulator’s words can affect behaviour, they do not change the law. Some employers may stand their ground or make the case that this sort of increase in contributions is not appropriate in their circumstances. Others may put more energy into debating how the deficit gets measured in the first place.”

Lynda Whitney, partner at Aon Hewitt, said the regulator’s stance was a warning “with the threat that TPR will take more action than in the past if they do not think there is a fair balance between the treatment of the legal obligation to the scheme compared to shareholders”.

TPR has a difficult balance to strike. Research from the International Longevity Centre published last year claimed that deficit reduction contributions had taken almost £100 (€117) away from individual employees’ wage growth.

Separate work by JLT Employee Benefits in January reported that the cost of DB benefits was proving a drag on employer payments to defined contribution schemes.