The Pensions Regulator has ordered Southern Water to pay £50m more into its pension, following an investigation.
TPR took action after over what it described as an imbalance between the funds contributed to the pension scheme, and the level of dividends paid to shareholders in 2016 and 2017.
These dividend payments amounted to £190m.
The action helped bring about a settlement which will now see Southern Water pay £50m more into the scheme over a shorter recovery plan period. Initial payments will be up to twice as much as before, with every subsequent payment also higher.
A dividend sharing mechanism will ensure future dividend payments do not lead to unfair treatment of the scheme.
TPR says Southern Water could have afforded to pay off the scheme’s deficit far sooner, had it not made such large dividend payments. In a report TPR says this amounted to “unfair treatment of the scheme.”
TPR began regulatory proceedings and issued a Warning Notice to the trustee and company to say it was seeking to exercise its Section 231 funding power over its concerns about the level of payments to the scheme.
It later opened an anti-avoidance investigation following the dividend payments by the company.
TPR’s executive director of frontline regulation Nicola Parish says: “We are pleased Southern Water and the scheme trustees have taken on board our concerns and that a strong outcome has been agreed.
“During our lengthy investigations into Southern Water it became clear that in our view the pension scheme was not being treated fairly. We considered that Southern Water could afford to clear the scheme’s deficit much more quickly without negatively impacting the company’s growth prospects.
“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. This has now been addressed.
“We are clear that we will take action where we see substantial dividends with low scheme contributions and long recovery plans.”
She points out that the new dividend sharing mechanism will mean that if shareholder dividends reach a pre-agreed threshold the company will increase the amount it pays into the pension.