Pensions watchdog kills his golden goose
The UK Pensions Regulator has warned companies not to pay dividends if they are cutting contributions to pension schemes with deficits. Has it struck him the deficits result from lower share prices at companies cutting their dividends?
It is a circular argument but a real one. The regulator, set up four years ago, has placed himself at the head of the queue of creditors and others with claims on a company but he is in danger of exacerbating the problems he hopes to cure.
Of course paying pensions is more important that satisfying shareholders in the long-term but in the short-term, rewarding the investors now may ensure the funds have sufficient for all later.
His concern is not that pension funds cannot make current payments but that a deficit threatens their ability to pay in the future – perhaps decades into the future. But if a company cannot survive the short-term it will not be here in the long-term: there are times when it may be right for the fund to postpone its immediate claims so that its sponsoring business is able to make them up at a later date.
Companies put off capital expenditure and research when cashflow is tight with the intention of increasing spending when business improves. They allow overdrafts to rise to finance them through the rough. They may even delay painting the premises until they can afford it, even though the work will be made greater by the delay.
In a normal world, pension contributions would be deferred with the intention of making higher payments to the scheme later. The Pensions Regulator does not inhabit a normal world however: he wants schemes topped up now – even if cutting dividends knocks share prices and makes the deficits on funds larger.
