The Pensions Regulator wants trustees of defined benefit funds to agree with sponsoring employers on a strong funding target and a short recovery plan before paying dividends to shareholders, the U.K. regulator said in its annual funding statement Tuesday.
The TPR set out a number of expectations that trustees of U.K. defined benefit plans should be considering as guidelines ahead of this year's valuation. The TPR segmented pension funds into groups according to the strength of the employer's obligation to support its DB plan, known in the U.K. as a covenant.
Where dividends and other shareholder distributions exceed deficit repair contributions, the TPR expects a strong funding target and recovery plans to be relatively short, it said.
However, if an employer has a weaker covenant, the TPR wants its deficit repair contribution to be larger than dividends unless the recovery plan is short and the funding target is strong, the regulator said.
But if the employer is weak and unable to support the plan, "we expect the payment of shareholder distributions to have ceased," TPR said.
"Since the majority of schemes are now closed to new members, we expect scheme maturity issues to assume greater significance for setting funding and investment strategies in the future," TPR added.
"Businesses with pension (fund) valuations this year will be under considerable pressure to pay higher contributions to their pension (funds)," said Patrick Bloomfield, partner at the consulting firm Hymans Robertson, in an emailed response to TPR's statement.
Mr. Bloomfield said higher contributions would be "incredibly unwelcome" for employers "wrestling with rough trading conditions" or uncertainty surrounding Brexit.
"If businesses are struggling, TPR will be highly likely to intervene to put the interests of pensioners ahead of investors," he said. "By segmenting businesses and (plans) into categories, TPR is able to be more directive about what it expects."