Pensions before dividends, UK regulator orders

UK defined-benefit pension schemes have fallen heavily into deficit in recent months as a result of the economic crisis. The value of fund assets - especially equities - has plummeted, while liabilities have increased as a result of falling government bond yields, used as a discount rate for calculating liabilities by regulators. At the end of January, according to the Pension Protection Fund, the 7,800 defined-benefit funds it tracks were collectively £190.6 billion in deficit, compared with a deficit of £48.8 billion a year ago.

The Pensions Regulator acknowledged the downturn would make it more difficult for companies to act to repair deficits, but warned pensioners should not be pushed to the back of the queue. "There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency. But the pension recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders," the regulator said today.

However, the regulator would not oppose companies who wanted to delay their deficit recovery plans until the economy improved. "Pension schemes are long-term undertakings and the challenges presented by current economic circumstances should be seen within this longer-term context. Where there are short-term concerns over affordability - and where trustees and the employer agree to reschedule the deficit recovery plan to maintain the long-term health of the employer - a back-end loaded plan might be more appropriate than extending the plan length," it added.

Pension obligations played a part in the bankruptcy of Canadian telecommunications company Nortel on January 14, and are forecast to have the same effect on others - leading governments in both Canada and the US to loosen deficit rules to give struggling companies more time to repair their pension funds.

See also: Perfect storm
Pension deficits soar as equities and bonds tumble