Some of the UK’s largest listed companies are agreeing to share future dividend payments with their pension schemes, as they strike deals with trustees to ease the pressures triggered by Covid-19.
Since the start of the pandemic, around 200 companies backing traditional “final salary” style pension plans have sought to negotiate contribution holidays with their retirement schemes to deal with a cash crunch brought on by lockdowns.
British Airways this week secured a deal with pension trustees to defer £450m of scheduled payments.
BA is the highest-profile company to unveil such a move but more companies are expected to defer payments, particularly in hard-hit sectors such as retail, hospitality and transport.
BA agreed that, as part of the deferral plan, dividend payments to its parent group, IAG, would, from 2024, be matched by contributions to its pension scheme at 50 per cent of the value of dividends paid.
Pension experts said more businesses were agreeing to deals that limit cash leaving the business through future dividends or other spending.
“We are seeing more of these mechanisms, where the trustees and company will agree to share any upside going forwards, such as dividend payments or profits,” said Wayne Segers, partner with XPS, the consultancy.
“For example, profits above a certain level may lead to increased or faster payments to the pension scheme.”
Mike Smedley, partner with Isio, a pension consultancy, said in “normal times” trustees considering payment holiday requests might seek security over business assets or look for other tangible support.
“But in the current environment businesses have limited flexibility and trustees’ focus is to limit the downside risk,” said Smedley.
“Essentially if a company has spare cash and a substantial pension deficit, expect the trustees to want their fair share.”
Tui, the tour operator, has £45m in outstanding deferred pension contributions, after last year repaying contributions that had been missed between April and June. It declined to say how it planned to repay the current deferred pension debt.
Mitchells & Butlers, the pub group, has deferred £13m in pension payments, and expects to repay this in a cash lump sum.
Whitbread, the UK’s largest hospitality company, announced in October that it had agreed with its pension fund that no dividends could be paid before March 2022, although it said it had not suspended its contributions.
The Pensions Regulator is advising trustees to take a pragmatic approach to requests for payment suspensions. It could not immediately provide a total value for contributions deferred.
“Our goal during the Covid-19 pandemic is to balance the short-term health of a sponsoring employer with the long-term protection of pension savers through the easements we, and the government, have introduced,” said a spokesperson for regulator.
“We are clear that the best support for a pension scheme is a strong employer. So it is vital that we support businesses and trustees through this crisis while balancing the risks to members.”