Southern commits to £50m pension injection after Pensions Regulator probe

Southern Water will pay £50m more into its pension scheme over a shorter recovery plan period following an investigation by The Pensions Regulator (TPR).

TPR took action over what it felt was an imbalance between the funds contributed to the Southern Water Pension Scheme, which has 4,000 members, and the level of dividends paid to shareholders in 2016 and 2017.

TPR argued Southern Water could have afforded to pay off the scheme’s deficit far sooner, especially given the £190 million it paid in dividends in 2016 and 2017. As at 31 March 2016, the date of its last triennial valuation, the scheme had an ongoing deficit of £252m. Due to concerns over late valuations and recovery plans submitted by Southern Water, TPR launched investigations into the scheme’s triennial valuations as at 2010 and 2013. The regulator reported the company intended to pay dividends of approximately £210m between 2015 and 2020. At the same time it proposed halving its annual deficit recovery payments from c£20m to c£10m a year.

The regulator started proceedings under its section 231 funding power, which allows it to impose a recovery plan. But a settlement was reached with the company, avoiding potentially lengthy litigation.

Southern has also agreed to a dividend sharing mechanism which will ensure future dividend payments do not lead to unfair treatment of the scheme.

TPR’s executive director of frontline regulation, Nicola Parish (pictured) 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.”

Section 231 of the Pensions Act 2004 gives TPR the power to:

• set a scheme’s technical provisions (the scheme’s statutory funding target);

• impose an RP and/or schedule of contributions (how the funding target is to be met or maintained); and

• modify the rate of the member’s future benefit accrual.