UK companies using half of dividends to offset pensions deficits
UK - Fifteen FTSE 350 companies filing deficit reduction plans in 2012-13 will see deficit contributions account for more than half of their dividends, according to figures from the Pensions Regulator (TPR).
Seeking to outline how UK defined benefit (DB) pension funds have used flexibility within the country's funding regime to address shortfalls, the watchdog said most schemes would still be able to continue with reduction plans as previously agreed or increase payments in line with inflation.
The regulator's findings come in the wake of its announcement in late April on how it would engage with trustees given the "challenging" economic environment and follows calls for the introduction of a smoothed discount rate similar to changes in a number of European countries.
The watchdog also estimated that more than 50 FTSE 350 companies submitting funding proposals would be forced to pay as much as 10% of annual dividends, based on the company's 2011 payment, to address scheme deficits.
More than 30 would pay as much as 20%, and more than 20 would be forced to make payments worth between 20% and 50%.
TPR also noted that the use of contingent assets had increased "about seven-fold", with more than one in five funds during the 2010-11 evaluation period using such assets in place of cash contributions.
As of the most recent completed evaluation period, nearly 900 contingent-asset arrangements had been agreed - the majority being parent or group guarantees, followed by tangible assets such as real estate.
Discussing the current regulatory environment, executive director of DB regulation Stephen Soper said some funds would find making repayments "extremely tough" and would need to avail themselves of the flexibility in assumptions allowed by the regulator.
"The right balance is being struck, in our approach to the DB funding regime, between protecting retirement savers, protecting the [Pension Protection Fund] and maintaining employer viability," he said.
"But we want that judgement to be understood, which is why we have published our analysis."
The regulator also calculated that one in five schemes would be forced to increase deficit reduction payments my more than 10%, even if granted a three-year extension over current recovery proposals and with softened recovery assumptions in place.
More than a third of schemes would be able to keep the recovery payment increases below 10% if granted a three-year extension, while almost 20% of plans would be able to increase payments by 10% if granted a similar extension with equally softened recovery assumptions.
Responding to the regulator's publication, the National Association of Pension Funds said the data showed the "intense pressure" pension funds were currently under due to repeated rounds of quantitative easing and low Gilt yields.
The organisation's head of research Mel Duffield said: "The regulator's analysis suggests three-quarters of DB schemes are likely to need to extend the length of their 'recovery plans' by at least another three years, as well as increasing their contributions into their scheme to plug the deficit."
She added that the number of schemes requiring a flexible deficit reduction arrangement demonstrated the "exceptional times", and that, while the flexibility was welcome, it would not be sufficient.
Employer lobby CBI, meanwhile, renewed its calls for the introduction of discount rate smoothing.
Criticising the current regulatory regime as "pro-cyclical", director of employment and skills Neil Carberry said allowing companies extended recovery plans ignored the "distorted" deficit figures caused by low Gilt yields.
"Many businesses are being forced to pump yet more cash into their schemes, which does nothing for their key goal of delivering growth in the business," he said.
Carberry said a "longer-term view" of liabilities was needed, suggesting smoothing of the discount rate as already in place in a number of European countries, including the Netherlands.
"This is one of the few steps the government can take to boost growth without spending a penny," he added.
Duffield supported reconsidering the current valuation.
"There needs to be a wider rethink about how deficits are valued in relation to Gilts," he said.