Southern Water fixes pension fund after TPR investigation

Southern Water has incurred the wrath of The Pensions Regulator (TPR) after it was revealed the utility giant had prioritised dividend payments to shareholders over payments into the company pension scheme, despite a multimillion pound pension scheme deficit.

Following investigations over the course of the past three years by the pensions watchdog, Southern Water has now agreed to an accelerated pension payment regime that will see it pay £50 million more into its pension scheme over the next 11 years, including additional contributions to cover £30 million of the increase in the deficit since it was last valued in 2016.

Southern Water paid £190 million in dividends in 2016 and 2017 despite its £252 million pensions black hole. In a report published on Sunday (2 December), TPR says Southern Water could have afforded to pay off the scheme’s deficit far sooner given the level of dividend payments and this amounted to unfair treatment of the scheme.

TPR began regulatory proceedings following concerns about the level of payments to Southern Water’s pension scheme and issued a warning notice to the trustee and company in June 2017 that it would for the first time resort to exercising its section 231 powers, which could have forced the company to make a cash injection into its pension fund.

This was dropped after a settlement with Southern Water was reached. As a result of the regulator’s intervention, Southern will now pay £223.5 million into its pension scheme over 12 years compared with £170.5 million under its old plan.

Nicola Parish, TPR’s executive director of frontline regulation, said: “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,” Parish added.

Southern Water has now introduced a dividend sharing mechanism, which means that if dividends are paid to shareholders above a certain threshold the company will increase the amount it pays into its 4,000-member pension scheme. The mechanism is designed to ensure the scheme shares more fairly in the company’s success.

In a statement, Southern Water said: “We are pleased to have completed negotiations for our final salary pension scheme and an updated plan is now in place. A new management team are now leading the transformation of Southern Water and are committed to dealing with historic issues such as this.

“Given the increased pension deficit we have agreed to increase contributions to ensure that members interests continue to be our priority,” the statement continued. “In addition, our shareholders (who are mainly themselves pension funds) have supported the introduction of a sharing mechanism such that deficit repair contributions will increase with dividends.”

It is not the first time that water companies have come under fire for misalignment in the way they treat shareholders and members of their pension schemes.

In April the chief executive of Ofwat Rachel Fletcher wrote an open letter to Frank Field MP, chair of the work and pensions select committee saying that companies should consider pension obligations when making dividend decisions. However “it is not Ofwat’s role to regulate how much companies should pay in to their pension funds,” she added.