Large plan sponsors should commit to reducing defined benefit fund deficits over a shorter period of time instead of paying out high dividends to shareholders, the U.K. pensions regulator said in its annual funding statement Thursday.
The Pensions Regulator said it was concerned about the increasing gap between dividend payments and deficit-reduction payments, and called on plan sponsors to reconsider the choice of valuation methods and investment strategies to counter these deficits.
"The discount rate should be chosen using integrated risk management principles that are consistent with their long-term funding and investment targets and the view of the employer covenant," the TPR statement said.
In addition, the regulator warned that intragroup loans and transfers of business assets at less than fair value were as detrimental as dividend payments.
"In our 2018 (report) we are being clearer about our expectations of how trustees should approach their plan valuations. Recent corporate failures have shown the risks of long recovery plans while payments to shareholders are excessive, relative to deficit-repair contributions," Anthony Raymond, interim executive director of regulatory policy at the TPR, said in a news release.
"Trustees should negotiate robustly with the sponsoring employer to secure a fair deal for the pension plan, while employers should balance the interests of participants with returns to shareholders and investors," Mr. Raymond said in the release. "We are working more closely than ever with trustees to support them in this process. However, if trustees fail to act we can intervene to protect participants by using the full range of powers available to us now."
The TPR also asked plan sponsors and trustees to focus on risk management and contingency planning in the context of persisting economic uncertainty.
