TPR fires warning shot over dividend to DRC balance

The regulator's annual funding statement found that DB funding levels have marginally improved on average, but contained a warning note for those involved in all schemes, regardless of covenant strength.

Schemes with strong employers should look to reduce the length of recovery plans, strengthen technical provisions or seek out contingent assets or guarantees, especially where dividends "and other forms of covenant leakage" are high in relation to contributions, the report stated.

Meanwhile, those with weaker sponsors should "prioritise scheme liabilities over shareholder returns". That could mean encouraging the company to keep cash within the company and available to the pension scheme, assessing affordability, and reducing risk where possible.

Among the many expectations for trustees is carrying out stress tests, and monitoring the level of transfer activity from the scheme.

The regulator said it remained "concerned about the growing disparity between dividends and deficit-reduction payments and expects fair treatment between shareholders and trustees". It will use its powers if the balance is not redressed.

The statement reveals a regulator keen to demonstrate its tougher new approach, with proactive DB funding casework stepped up by 90 per cent.

Anthony Raymond, interim executive director of regulatory policy, said: “Recent corporate failures have shown the risks of long recovery plans while payments to shareholders are excessive, relative to deficit-repair contributions."

He added: “Trustees should negotiate robustly with the sponsoring employer to secure a fair deal for the pension scheme, while employers should balance the interests of pension savers with returns to shareholders and investors. We are working more closely than ever with trustees to support them in this process."

The regulator is now working to implement the government's recent white paper proposals.