The Pensions Regulator (TPR) has recently set out its latest annual analysis of pension scheme valuations and recovery plans.
Their analysis shows that for the majority of schemes, while assets have grown, market conditions have caused projected liabilities to grow even further. As a result, many schemes are likely to have higher deficits and lower funding levels. TPR concludes that this will require increases in deficit repair contributions - which they see as affordable by the majority of employers.
Their analysis then compares deficit repair contributions and dividends paid by FTSE-350 corporate pension scheme sponsors, highlighting that deficit repair contributions from this group of companies have fallen from 10 per cent of dividends to 7 per cent over the period from 2012. Equally interesting is what this analysis does not address: the relationship between other claims on company cash flow, notably debt finance costs, capital investment and R&D plus the fact that many pension schemes themselves rely on dividends from their own investment portfolios. Pension schemes don’t exist in isolation from UK plc.
What conclusions can we draw from this?
Given the current ultra-low yield/low return environment and many schemes’ de-risking strategies, companies will continue to be under pressure to increase pension deficit funding and can expect some challenge when there is a wide disparity with dividends. Pension trustees will need to work with their sponsors and covenant advisers to look beyond this binary comparison and form a coherent view of all the major claims on corporate cash flow.