New pension regulator rule could worsen dividend drought
The new guidelines require companies to prioritise making up for missed pension contributions.
19th June 2020 10:34
The new guidelines require companies to prioritise making up for missed pension contributions.
The last few months have seen the start of the so-called dividend drought, with hundreds of companies cutting or suspending their dividend payments to shareholders.
However, according to Steve Webb, a partner at pensions consultants LCP, new guidelines published this week by the Pensions Regulator could lead to a further decline in dividend payments to shareholders.
Webb points out that previous guidance from the regulator recommended that pension fund trustees allowed cash-strapped companies to delay contributions to their pension funds so-long as they put dividend payments on short-term hold.
When exactly companies could start paying dividends was never made clear.
The new guidelines, however, require companies to prioritise making up for missed contributions.
The new guidelines stipulate: “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”.
In practice, this means that companies that have delayed pension contributions are not allowed to restart paying dividends until they have repaid the total amount of all missed pension contributions.
With roughly 10% of all company pension schemes so far seeing contribution deferrals, this will significantly hamper their ability to start paying dividends once again, LCP warns.
Shayala McRae, senior consultant at LCP, noted: “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’.”
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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