Companies may have to sideline dividends for pension top-ups

Firms have already pumped £200 billion into retirement pots.

Companies may have to prioritise pension contributions over dividend payments to investors and shareholders to fill gaps in final salary schemes.

Research by consultancy Lane Clark & Peacock (LCP) found firms have pumped £200 billion into pensions over the past 15 years to cover shortfalls.

This was done to keep up with payments to policyholders amid falling share prices and declining bond yields.

A report from LCP, titled Reducing Risks, Building for Growth, suggests firms could lower dividend payments so they have more cash to fund their defined benefit (DB) pension schemes.

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Jonathan Griffith, a partner for LCP, says: “There are many challenges on the horizon for pension schemes, particularly around the impact of new regulations on funding, continued market volatility, and the uncertainty around the impact of Covid-19 on life expectancies.

"That said, following a year like no other and over a decade of volatility, the pension schemes of FTSE 100 companies have started 2021 from a position of strength - with improved funding levels and reduced risk."

Joe Dabrowski, deputy director of policy for the Pension and Lifetime Savings Association, says funding levels have changed in recent years.

He adds: “Data from the Pension Protection Fund suggests that the overall funding of DB schemes is in a more positive place than previously.

“It has also been helpful that during the pandemic the Pensions Regulator has – where appropriate – been willing to adopt a flexible approach to contribution payments.”

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Dabrowski says there is still uncertainty for final salary schemes.

He adds: “The economic waters ahead do look uncertain and this will present challenges for schemes and employers and we may see volatile movements in scheme funding.”

Last month, interactive investor reported that pension withdrawal values were lower than average during the Q1 lockdown.

But there was still a 6% rise in the total value of withdrawals from pension pots in the first three months of 2021.