UK private utility company Southern Water will pay £50 million ($64 million) more into its pension plan over a shorter recovery period following an investigation by The Pensions Regulator (TPR).
TPR said it took action over what it believed was an imbalance between the amount of funds the company contributed to the Southern Water Pension Scheme, and the £190 million TPR said it paid out in the form of dividends to its shareholders in 2016 and 2017.
“During our lengthy investigations into Southern Water it became clear that in our view the pension scheme was not being treated fairly,” Nicola Parish, TPR’s executive director of frontline regulation, said in a release. “We considered that Southern Water could afford to clear the scheme’s deficit much more quickly without negatively impacting the company’s growth prospects.”
Due to the disparity between the company’s dividend payouts and pension contributions, TPR began regulatory proceedings and issued a warning notice to the plan’s trustee, and the company to say it was seeking to exercise power over its concerns about the level of payments to the plan. The regulator later opened an anti-avoidance investigation following the dividend payments by the company.
TRP said its actions helped lead to a settlement in which Southern Water agreed to pay £50 million more into its pension over a shorter recovery plan period. Initial payments will be up to twice as much as before, with every subsequent payment also higher, the regulator said.
The company also agreed to start a dividend-sharing mechanism to prevent any further imbalance between dividend payouts and contributions to the plan. Under the mechanism, if dividends exceed a certain threshold, the company will increase the amount it pays into the pension to help ensure the pension members enjoy more of the company’s success.
The pension plan, which was established in 1988, is open to accrual but closed to new members. It currently has nearly 4,000 members and as at 31 March 2016, it had an ongoing deficit of £252 million.
“The company and trustee’s decision in 2015 to halve contributions to the pension scheme and pay them over an extended period whilst later paying substantial dividends despite a growing scheme deficit meant the risk to member benefits was unacceptably high,” said Parish. “We will take action where we see substantial dividends with low scheme contributions and long recovery plans.”
