To pay or not to pay a dividend? #PwCDeals
Our Pensions Support Index measures the ability of companies in the FTSE 350 to support their defined benefit promise.
This year’s Pensions Support Index (PSI) score of 87 remains unchanged from the end of 2017, when covenant strength returned to pre-recession levels for the first time since the financial crisis. However, 55% of the 192 schemes with a FTSE 350 sponsor have a score of more than 95, so although the score may appear to be stable, the underlying data shows a grouping of companies with high scores and a large number of companies with a spread across the weaker end.
The 2019 analysis shows that schemes with very strong scores are able to pay off their self-sufficiency deficit within one year of dividends. This raises the question of how much corporate cash should be paid into a pension scheme as opposed to dividend payments to shareholders, as for these companies making good pension promises is now a matter of choice rather than an affordability constraint.
The Pensions Regulator (TPR) is clearly focusing on schemes right across the covenant spectrum, with continued evolution of pensions policy and increased intervention. TPR is adopting a much more proactive approach, focusing on shorter recovery plans and equitable treatment of schemes relative to other stakeholders. Meanwhile, for those with weaker employers, pension Trustees are being encouraged to adopt a ‘bank - style’ approach when protecting the rights of members.
The pressure on trustees and employers alike is increasing in finding the balance between keeping shareholders invested in the business versus TPR’s view of equitable treatment. What we can certainly expect is for TPR to be actively involved in these discussions.
Whether a company is weak or strong, the days of TPR being a referee and not a player are over.
It is surprising to think that pensions legislation and best practice continues to evolve at such a rate, when it is now 15 years since the 2004 Act which set out many of TPR’s powers.
Whilst those powers currently remain the same, the sentiment in the market and the perception as to TPR’s use of those powers has transformed in recent months. Our recent survey of the pensions legal community shows that their view has also changed, with 80% believing that TPR’s powers are having an impact on their clients, compared to just 30% three years ago.
TPR’s mantra of being clearer, quicker and tougher seems to be sinking in and, perhaps more than ever before there is a political will (driven in part by the Work and Pensions Select Committee) for government to support this approach. As can be seen from the timeline there have been numerous recent publications from the TPR.
TPR said in the 2019 Annual Funding Statement that it would like to see:
The Pensions Support Index tracks the relationship between the financial strength of the FTSE 350 companies and their defined benefit pension obligations, indicating the overall level of employer support offered to these pension schemes. Rather than just looking at the absolute size of the obligations, we compare the deficit number to the cash generation, profitability and assets of companies supporting their schemes.
Where appropriate, calculations have been restated for updated actuarial assumptions.
The PSI should not be viewed as a replacement for an employer covenant review or other professional advice.