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Pensions issues on paying dividends

Recent high profile insolvencies have highlighted the need for both companies and trustees of UK pension schemes to consider the implications of dividend payments on the security of the pension scheme.
Dividends can affect the strength of the employer support (covenant) available to a pension scheme.
Any change in the strength of the covenant as a result of a dividend payment could impact on ongoing funding arrangements. If there is a material adverse change, trustees may look at their options to agree new ongoing funding arrangements with scheme employers. Dividends will also be relevant when trustees look at the affordability of deficit contributions.
A dividend payment could also raise potential risks of the Pensions Regulator exercising its moral hazard powers to issue a contribution notice or a financial support direction.
This briefing outlines:
  • the UK pension implications for a scheme employer (Employer) and its parent company (Parent) of:
    (i) a dividend to shareholders by the Parent, and
    (ii) an intra-group dividend by the Employer to its Parent (eg to fund the Parent to pay its own dividend); and
  • the actions that the Parent and the Employer should undertake to limit any trustee concerns and the risk of Pensions Regulator actions regarding the impact of the proposed dividend on the scheme.

Freshfields- Pensions issues on paying dividends
(PDF - 3 MB)

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