Fletcher offers pledges on prices and pension deficits but not pension closures

Ofwat has pledged that water industry gains are shared with customers as well as shareholders and that shareholders would bear the full costs of any growth in pension deficits since a 2009 valuation. But no judgement on the appropriateness of companies closing their defined benefit schemes, was included in Ofwat chief executive Rachel Fletcher’s response to questions from chair of the Work and Pensions select Committee, Frank Field MP.

The responses follow a letter from the MP on water company moves to close their defined benefit pensions in which he asked questions relating to pensions, executive pay and dividends.

In answer to Field’s request for Ofwat’s view of proposals by Anglian Water and United Utilities to close their defined benefit pension plans “while continuing to make large distributions to shareholders,” Fletcher said: “It is for companies to make decisions on how they manage their business within [price control] allowances to meet their commitments to customers, to the environment, and to employees. Decisions on the benefits offered to employees are a part of this judgement. Under our regulatory regime, where companies meet their obligations more efficiently than we assumed when setting prices, the gains are shared with customers, and are not captured only by shareholders.”

On Field’s question on what the regulator might to influence: shareholder dividends; executive remuneration and pension scheme funding Fletcher emphasised that dividends must not impair the ability of the regulated company to finance the regulated business.

“Under a system of incentive regulation, dividends would be expected to reward efficiency and the management of economic risk,” she added and went on: "We make no judgement about the appropriateness of companies closing their defined benefit schemes to future accruals, and it is not Ofwat’s role to regulate how much companies should pay in to their pension funds.

In her answer to the select committee chair’s demand for a response to his request for Ofwat’s argument for “already well-rewarded shareholders to be spared these costs through the closure of the schemes,” Fletcher wrote: "We have been clear that shareholders would bear the full costs of any growth in deficits since 2009 valuations. We do not expect that decisions by companies to close their schemes to future accruals will reduce their exposure to funding the deficit repair costs as they stood when our approach was agreed."

Source Fletcher's letter