Pensions Regulator is right to get tough on employers who can afford to fund their pensions better
Pension obligations must come before shareholder dividends
Will be interesting to see what happens next with Guinness Peat Group
by Dr. Ros Altmann
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The Pensions Regulator is getting tough with Guinness Peat Group. This is an interesting development which will be watched carefully by other employers struggling to support their pension schemes.
We do not know all the details of this situation, however it seems that Guinness Peat Group, which is New Zealand owned, has around £369m in cash and is responsible for three pension schemes with deficits of around £237m. The Coats pension scheme is the largest with 27,000 members (but only 200 actively participating now). It has £1.4bn of assets and a £148m deficit, while the Staveley and Brunel schemes have £89m deficit.
The Regulator is right to worry about the security of the employer supporting the schemes. If Guinness Peat Group pays out its cash pile to shareholders, it may not be able to fund the deficits in future and, as the businesses are being restructured, there is a danger down the road of insolvency, forcing the schemes into the Pensions Protection Fund. That would put an extra burden on all employers supporting UK defined benefit pension schemes, that could have been avoided if the Regulator insists on the parent putting enough money into the scheme to ensure proper funding.
It is true that scheme deficits have been artificially inflated by the ultra-low interest rate environment and, of course, deficits may improve in future, but in the meantime the Regulator is correct to require sponsoring employers to keep enough cash reserves in place to make up the deficits if needed. If the funding position improves in coming years, then the employers will be able to pay out their cash, but if it is returned to shareholders too soon, the Regulator is unlikely to be able to force the firm to pay up later.
In the past, I have witnessed the devastating impact the loss of pensions can have on people’s lives. Many people have lost out when firms used corporate restructuring to take money out of businesses to reward shareholders while leaving pension schemes underfunded and members’ pensions in jeopardy.
Therefore, this pre-emptive action to prevent too much money being paid out while the pension schemes are still in deficit, is precisely what the Regulator was set up fo. The many other employers struggling with their pension deficits – as well as having to pay PPF levies – will be pleased to see precautions being taken to protect the future funding of the pensions lifeboat. The interests of the pension scheme and its members should take precedence over the interests of shareholders, particularly in companies with limited ongoing employment and production and large numbers of pensioner members. This is not an easy balancing act, but better to try to protect the pension scheme while a company has the ability to fund it, than to try to bolt the stable door once the money has gone.