UK - The Pensions Regulator (TPR) has reassured employers it will continue to implement its scheme funding rules "pragmatically" in the economic crisis, but warned pension plans should not suffer to allow firms to pay dividends to shareholders.

In a statement for employers TPR said the existing funding regime is "flexible'" enough to cope with the economic downturn, and confirmed there is "potential" for employers to renegotiate existing recovery plans for pension deficits if the under pressure.

TPR acknowledged that the position of trustees of a pension scheme in deficit is similar to unsecured creditors and said there "is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency".

It pointed out its 'trigger' for further scrutiny of recovery plans is currently 10 years, however it said it had approved plans with a range of length from less than one year to over 20 years, depending on the circumstances, and added it would "continue to apply the flexibilities in the system pragmatically, looking for outcomes in the best interests of the scheme and sponsor".

But the organisation warned "the pension recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders".

TPR, which issued a similar statement to trustees in October 2008, said trustees should be able to understand what is "reasonably affordable" for the sponsoring employer, and highlighted that "all unsecured creditors must be treated equitably and the pension scheme not disadvantaged". (See earlier IPE article: TPR predicts market impact on recovery plans)
David Norgrove, chairman of TPR, said: "We are sensitive to the pressures many of these employers face in current economic conditions with falling asset prices and increasing deficits. Any employer who believes that an existing recovery plan is at serious risk of jeopardising the company's future health or solvency should discuss this with their pension scheme trustees, and we would encourage schemes and sponsors to talk to us if they have concerns."

However the pensions industry has warned the regulator is "walking a tightrope" between being too tough and too soft, and the requirement to place the pension scheme ahead of dividends could still hurt pension funds as investors.

Rash Bhabra, head of corporate consulting at Watson Wyatt, said: "What this statement does not say is as important as what it does. Most companies are sticking to contributions agreed in more benign circumstances and know these contributions won't pay off deficits as quickly as they thought. The Regulator has not commented on dividends paid out in these circumstances."

"Ultimately, the Regulator is walking a tightrope. If it is too tough, it will push more companies into insolvency; if it is too soft, pension schemes will have less money in cases where the employer would have become insolvent anyway," said Bhabra.

Paul Jayson, partner at Barnett Waddingham, claimed the announcement is "another disincentive to invest in companies with a pension scheme", as he suggested investors would "shy away" if they see the dividend, or reward, for committing to that company will not be paid until the pension scheme is satisfied.

Jayson said: "The 'restriction' on paying dividends to ease the funding burdens on employers may be counterproductive. Pension schemes are major investors in equities and hence whilst this restriction could lead to Scheme A's funding not being reduced, it could hurt Scheme B due to lower returns on their investments, and indeed hurt Scheme A as an investor in other companies' shares."

David Saunders, partner at the law firm Sacker and Partners, suggested the statement would be viewed by employers as a "note of realism" by TPR, but warned "it's not a green light to cut back on pensions spending whilst maintaining "business as normal" with other stakeholders".

"The Regulator clearly expects everyone to share the pain. It will add greater significance and urgency to assessing the employer's covenant. Trustees will need to complete proper due diligence to understand the difficulties employers are in before agreeing to relax any existing funding plans," he added.

Alex Waite, partner and head of Lane Clark & Peacock (LCP) Corporate Consulting, suggested there is "always a three way pull for cash between pensions, dividends and investing in the business".

"Finance directors need to be realistic, reducing pension contributions to enable higher dividend payments is going to be unacceptable in most circumstances. But companies are going to have to work with trustees to ensure that the needs of everyone are balanced through these tough times," Waite added.

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