Utility Week

6 | 14TH - 20TH DECEMBER 2018 | UTILITY WEEK News Inside story T he pensions arrangements of the UK's water companies are once again under the spotlight aer Southern Water was forced to accelerate payments to plug its multimillion-pound pension deficit amid concerns by The Pensions Regulator (TPR) of unfair treatment of the company's pension scheme. Southern Water, which supplies 4.6 mil- lion customers in Kent, Sussex, Hampshire and the Isle of Wight, has agreed to pay an additional £50 million into its pension fund over a shorter period aer being threat- ened with formal enforcement action by the pensions watchdog. The water company prioritised dividend payments to shareholders – ironically, many of which are pension funds – over payments into the company pension scheme, despite facing a £252 million pensions black hole. Southern Water paid £190 million in divi- dends in 2016 and 2017, however a three-year investigation by TPR concluded the company 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's settlement with Southern Water will see the water company now pay £223.5 million into its pension scheme over 12 years, compared with £170.5 million under its old plan, including additional contributions to cover £30 million of the increase in the deficit since it was last valued in 2016. Nicola Parish, TPR's executive director of frontline regulation, said: "The company and trustees' decision in 2015 to halve con- tributions to the pension scheme and pay them over an extended period whilst later paying substantial dividends despite a grow- ing scheme deficit meant the risk to member benefits was unacceptably high. This has now been addressed." Dividend-sharing mechanism Southern Water has also introduced a dividend-sharing mechanism, which means 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. It is clear that defined benefit pension funds are increasingly under pressure to put in place dividend-sharing mechanisms as the regulator seeks to address the disparity with deficit contributions. However it is unknown whether Southern Water's own mechanism was introduced as a result of pressure from the regulator. 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 man- agement team are now leading the transfor- mation 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 misalignment in the way water com- panies treat shareholders and members of their pension schemes is far from a new con- cern. In April, following plans by Anglian Water and United Utilities to close their defined benefit scheme to future payments, the chair of the House of Commons Work and Pensions Select Committee, Frank Field MP, accused water companies of continuing to make large payments to shareholders while cutting their workers' pension benefits. In a letter to Ofwat chair Rachel Fletcher, Field highlighted that over the past five years, United Utilities had reported total post-tax profits of £1.6 billion, of which it has paid £1.2 billion in dividends to shareholders. Meanwhile, over the same period, Anglian had paid out half of its net profits of £1.6 billion in shareholders' dividends. "There appears to be no effective restraint on these firms' policy of distributing massive sums to shareholders while cutting the pension ben- efits that their employees are counting on for their retirement," Field wrote. The changes to the accrual arrange- ments, which unions claim could cost younger workers up to £10,000 per annum in lost retirement income, resulted in strike Age old problem of pensions As Southern Water incurs the wrath of The Pensions Regulator, Rachel Willcox asks whether it is time for action to redress the balance between pension deficits and shareholder dividends. £50 million additional amount Southern Water has agreed to pay into its pension scheme after an investigation by The Pensions Regulator £190 million amount Southern paid into its dividend in 2016 and 2017… £252 million …despite a pensions black hole £223.5 million amount Southern will pay into its pension scheme over 12 years £170.5 million amount the firm would have paid under its old plan £1.6 billion post-tax profits reported by United Utilities over the past five years £1.2 billion amount of this it paid in dividends to shareholders £1.6 billion net profits of Anglian Water in the past five years KEY NUMBERS

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