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Companies should carefully consider the payment of dividends

Companies with associated defined benefit pension schemes should carefully consider decisions regarding the declaration and payment of dividends for 2020-year ends, says Sunil Bhavnani.

The effects of the COVID-19 pandemic continue to be far reaching on company financial performance and results. Companies will be focused on operationally riding out the storm in the short term to survive and remain a going concern. A range of measures will have been taken to stabilise the business and preserve cash through deferral of rent payments, access to rent concessions, deferral of VAT and tax payments, access to Government or local authority-funded grants or subsidies such as the Job Retention Scheme (JRS) etc., and management of discretionary expenditure.

Those companies with associated defined benefit pension schemes will have other considerations towards the scheme and its members alongside the measures taken to protect the sponsoring employer during this period of uncertainty. The majority of such schemes are closed to new entrants, and pension liabilities relate to pensioners, deferred pensioners and current employee members. Companies will have deficit reduction plans agreed with trustees at the last funding review. These deficit reduction plans present significant cash obligations for the sponsoring employer.

Some companies may have taken advantage of the temporary flexibility introduced earlier this year by the pensions regulator to reduce or suspend pension contributions for a period of three months. This allowed trustees to agree a three month suspension or reduction in deficit contributions without the need for full information from the employer on the employer covenant. Those employers that agreed suspensions with trustees for periods longer than three months would have been required to provide more information about the company business plan and the effect of COVID-19 on the business.

Notwithstanding cash and the availability of distributable profits, which themselves could be significantly reduced by pension deficits, directors may need to be cautious about dividend distributions and other forms of value leaving the business during this period of uncertainty and volatility, notably if contributions had been suspended during the year.

The Pensions Regulator recommended trustees seek precautions such as all dividends and other forms of shareholder distribution to stop throughout the period of suspension and not to start again until the deferred or suspended contributions have been paid. Many funding reviews will have been undertaken pre-pandemic. Significant volatility in asset prices, low interest rates and changes in actuarial assumptions may have impacted on the size of the pension deficit for funding purposes. It’s important the pension scheme is treated fairly, alongside other stakeholders such as shareholders.

Would you like to know more?

If you would like to discuss the above or how it may affect you, please get in touch with your usual Blick Rothenberg contact or Sunil Bhavnani, using the details to the right.

For any press queries, please contact David Barzilay whose details are to the right.