Under previous guidance, pension fund trustees were encouraged to consider allowing cash-strapped sponsors to delay making pension contributions provided that other outgoings such as dividends had also been put on short-term hold. But until this week, the guidelines on when it would be acceptable for firms to resume paying dividends had been unclear.
Now the Pensions Regulator has set out a list of suggested ‘mitigations’ which trustees can ask for when faced with a request for further delayed contributions, and these include:
“All dividends and other forms of shareholder distribution to stop throughout the period of suspension and not to start again until the deferred or suspended contributions have been paid. (TPR statement 16th June 2020, emphasis ours);
TPR confirmed this week that around 10% of all schemes have so far agreed to defer pension contributions, which would suggest over 500 schemes in total could be deferring already, with more likely to have similar conversations over coming months.
If trustees insist that dividends cannot restart until all the suspended contributions have been reinstated (rather than potentially paid back over a period of years), this could significantly delay the point at which companies start to pay dividends again. Coming against a backdrop of major declines in the number of companies paying dividends, this is likely to further depress dividend levels for some time to come.
Commenting, Shayala McRae, senior consultant at LCP said: “Most companies have understood that if they want to ease off on contributions into their pension scheme, they have to hold off on paying dividends for now. But these new guidelines will encourage trustees to go further. Those who follow these suggestions will ask employers to make sure that all the missing pension contributions are made good before any dividends can be paid. This could lead to a significantly longer ‘dividend drought’ for many shareholders’.
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