Nearly two-fifths (38%) of FTSE350 employers paid dividends at least 20 times as high as their defined benefit deficit contributions last year, as 81% of companies paid more in dividends than deficit contributions. 

 

More than three-quarters of FTSE350 companies paid DB deficit contributions last year, but the proportion of companies paying at least 20 times as much in dividends than to their scheme increased to 38%, having fallen to 25% in 2020, according to a new report by consultancy WTW.
 

     

Median deficit contributions increased slightly, from £15.3m to £16m, and aggregate DRCs rose from £4.4bn to £4.6bn. 

 

The number of companies paying more in dividends than deficit contributions overall went up drastically over the year to 81%, having stood at 57% in 2020, when over half of companies in the FTSE 350 cancelled, cut or suspended dividends. Meanwhile, the Pensions Regulator reported that less than 5% of all DB scheme sponsors suspended deficit contributions. Conversely, in 2020, 43% of FTSE350 companies paid dividends that were equal or lower than deficit contributions. This proportion has now fallen to 19% but is still double the level before the pandemic.

In its latest Annual Funding Statement, the Pensions Regulator stressed that pension fund trustees should be seeking future protections such as contingency plans and dividend-sharing mechanisms given a changing economic environment and a pick-up in dividends.
   

   
David Fairs, TPR’s executive director of regulatory policy, said last month: “Conditions remain challenging for some schemes and employers and so we urge trustees to continue to focus on their long-term funding target and strategy."

The AFS noted that TPR had seen an increase in employers returning cash to shareholders by restarting dividends, paying ‘special’ dividends and share buybacks. "Trustees should be alert to this and consider whether their scheme is being treated fairly compared to other stakeholders," the regulator said.

 

Charles Rodgers, head of global pension accounting at WTW, said deficit contributions held up well at the height of the pandemic, with far fewer companies negotiating changes than had been feared. "The change in the dividend-to-deficit payment ratio reflects dividends being switched back on rather than pension contributions being switched off, though improving funding levels may also affect these numbers in future," he added.

 

 

As well as paying more dividends than DRCs, ever fewer employees have access to DB pensions, with just over a third (35%) of sponsors reporting that some employees continued to accrue DB pensions, down from 39% in 2020; the figure had been at 69% as recently as 2015, according to WTW. 

  

“We may be reaching a point where this trend slows: the particular circumstances of some schemes with ongoing accrual may make them difficult to close, while rising bond yields could reduce accrual costs,” said Rodgers. 

 

“The cost-of-living crisis may also stiffen opposition to closure from unions and affected employees, though some employers could argue that controlling pension spending could help make pay rises affordable for the wider workforce,” he added. 

 

Employees could not just see pension provision slashed but also their life expectancy. On average, companies assumed that male scheme members aged 65 in 2021 would die aged 87.0 years, and women at 88.6 years, lower than at any point in the past decade.  

  

Rodgers said that since the 2014 peak, reported life expectancies are down about a year for men and 17 months for women, amounting to a 3% or 4% reduction in DB liabilities.