Companies should put their retirement funds before shareholders when paying dividends, the official pensions watchdog has warned.
The Pensions Regulator (TPR) is also threatening to take action if companies are not treating their pensions fairly by failing to put contingency plans in place to cover shortfalls.
The warnings came in a hard-hitting annual funding statement for direct benefit pensions revealed 5% of employer schemes are struggling with funding.
The report explained market conditions were impacting company pensions in three different ways and called on trustees and employers to identify good practice for their scheme and to put the plan into action.
Strong warning for trustees
“The continuing uncertainty over future economic conditions and the persistent low interest rate environment highlight the importance of effective risk management,” says the report.
“All schemes need to have contingency plans which should involve taking appropriate action to recover their funding position and to mitigate against any further downside events.”
The watchdog also had some strong words for pension trustees.
“We are likely to intervene where we believe that schemes are not being treated fairly,” said the report.
“Trustees need to ensure that contributions to the scheme feature prominently in their employer’s considerations and that its legal obligations to the scheme as a creditor are recognised ahead of shareholders.
“We expect schemes where an employer’s total distribution to shareholders is higher than deficit reduction contributions being paid to the pension scheme to have a relatively short recovery plan and that the recovery plan is underpinned by an appropriate investment strategy that does not rely excessively on investment outperformance.”
TPR divides companies into three categories and expects trustees to protect employee funds.