Pensions Support Index 2019

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.

Renewed focus on dividend versus deficit reduction debate, as our analysis shows a polarisation of support across FTSE 350 pension schemes

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. 


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What is the Pensions Regulator doing?

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.

Weak scores - what does it mean and what will TPR focus on?

TPR is expecting schemes to act more like a bank or bond holder would in a negotiation, given the number of recent high profile insolvencies including Carillion and BHS where there were large pension schemes. This has focused both the public and politicians on improving the funding position of DB schemes, with the clear reputational, economic and social risk of similar events happening elsewhere. The timeline below shows just how many high-profile restructurings in recent times have involved a pension scheme.

Strong scores - what does it mean and what will TPR focus on?

TPR’s clearly articulated view is that, regardless of employer strength, the pension debt should be paid off as soon as possible. Strong employers are now under scrutiny with the expectation of their recovery plan being less than seven years. If a recovery plan is longer than this it should expect a very high level of scrutiny, in particular where there are significant dividends being paid.

Interestingly, our analysis shows that those companies with a PSI score over 95 could have paid off their self-sufficiency deficit within one year of dividends, and we expect even more scrutiny from TPR on equitability. We have seen and would expect TPR to want Trustees to conduct robust negotiation on the level of dividends vs DRCs. In our recent legal survey 9 out of 10 lawyers believed companies will divert cash from dividends to deficit repair contributions as a result of TPR’s guidance. 

Over the past decade, we have seen numerous examples of shareholders taking an active role in solving a pension problem, for example support for covenant-enhancing acquisitions, or rights issues. Therefore, there is a balance to be taken in how much to pay shareholders versus the pension scheme.

When it comes to dividends, it is the large one-offs from the Topco to external shareholders which attract the most public scrutiny. But for schemes it’s often the internal dividends from the employer to intermediate parents which cause the most damage to employer covenant. We have seen TPR increase its focus both on these and on other intra-group payments such as management charges.

Background - What has changed at TPR?

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:

  • Equitable treatment of schemes, particularly when compared to banks and shareholders;
  • Long term funding targets agreed;
  • Shorter recovery plans;
  • Use of contingent assets or other non-cash funding options if appropriate; (e.g. weak cash flow or concerns over trapped surpluses) ; and
  • Consideration of scheme maturity


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.

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Jonathon Land

Jonathon Land

Partner, Pensions Credit Advisory Leader, PwC United Kingdom

Tel: +44 (0)7879 411796

Jenny Copeman

Jenny Copeman

Senior Manager, PwC United Kingdom

Tel: +44 (0)7711 562145