Utility Week

UTILITY WEEK | 14TH - 20TH DECEMBER 2018 | 7 News action by hundreds of United Utilities staff in March. Meanwhile, union Unite says more than 5,000 Anglian Water workers are affected by the pension scheme's proposed closure and 3,700 more by proposed changes to a separate defined contribution scheme. Recovery of costs Although Ofwat granted water companies leeway in 2014 to recover some of the costs of deficit repair contributions – the amount they pay to plug their pensions black holes – through customers' water bills until the early 2020s, it noted "there are strong arguments for shareholders to bear these costs in future". In response to Field's letter, Ofwat chief exec- utive Rachel Fletcher said companies should consider pension obligations when making dividend decisions, but stressed: "It is not Ofwat's role to regulate how much companies should pay in to their pension funds." Speaking at the Labour Party confer- ence in September, shadow chancellor John McDonnell expressed his clear frustration with the situation and outlined proposals for taking back control of the water industry, vowing to end what he called "profiteering in dividends and vast executive salaries". Labour's policy document explains that par- liament would see shareholders in privatised water companies docked compensation on the basis of pension fund deficits. It's fair to say, this issue is by no means unique to the utility sector. Indeed compa- nies in the FTSE 350 index collectively paid seven times more cash to shareholders in 2017 than they did plugging their pension scheme deficits, according to analysis by actuarial consultants Barnett Waddingham. The FTSE 350 groups paid £8.7 billion in pension deficit contributions in aggregate last year, while £66 billion was issued in dividends, its analysis found. At the same time, George Salmon, an equity analyst at Hargreaves Lansdown, said he didn't think the Southern Water exam- ple suggested endemic problems across the sector. "Generally speaking, the big listed water utilities don't have too many prob- lems on their pension. For example, Pennon has a mild deficit of just £44.8 million, and United Utilities is currently running a sur- plus. While Severn Trent has a more sizeable deficit of £520 million, that's been meaning- fully reduced recently, and a funding plan is in place. "The bigger threat to dividends is prob- ably the tougher regulatory conditions loom- ing over the horizon. Ofwat is currently running the rule over the companies' plans for the 2020-25 period and we'll know more in the new year," Salmon said. However the pensions issue comes at a difficult time for the water industry, still reel- ing following disruption to water services as a result of "the Beast from East", which hit the UK in late February/early March this year. Water companies received widespread criticism aer more than 200,000 customers across England and Wales were le without water, some for several days. Revelations of high levels of payments to bosses and inves- tors by water companies have only served to further damage customer trust, regulator Ofwat admitted in July. Feeling the strain Benjamin Lind, strategy lead – utilities and energy at digital consultancy hedgehog lab, said the topic of executive pay and divi- dends is particularly charged at the moment, with more scrutiny than ever on payouts for C-suite executives and shareholders. Water and utility companies are no different. "Energy suppliers, in particular, are feeling the strain as the cost-base of the big suppliers continues to be eroded by an increasingly competitive marketplace and the incoming government price cap. There'll be even greater pressure to cut costs and, just as Centrica has proved, cuts to pension funds are a tempting target for energy sup- pliers looking to maintain their bottom line," Lind told Utility Week. "However, as we've seen with the back- lash against Southern Water, companies that do so run the risk of propagating the assump- tion that they don't care about their workers or customers and are only concerned about their balance sheets. Put simply: it's not a good look," Lind added. Manbir Thandi, a director of law firm DWF, defends claims on behalf of insur- ers specialising in litigation involving water companies. "It's a further reminder of the need to redress the balance between own- ers and employees. The pensions regulator is under pressure to counter the perception that regulation isn't working. This is the regulator showing its teeth. "All companies are under pressure to pay high dividends, but water companies need to show they're working for everyone. The onus is on them to show they're offering value for money to customers and behaving respon- sibly. They enjoy a monopoly and guaran- teed income streams and mustn't abuse that position. "Water company executives will look at Southern Water and realise they need to behave in a more responsive way. [This is one of a number of broader issues in the sector, including attempts to address leakage, levels of gearing and use of sophisticated offshore financing.] Companies need to maintain trust and invest in customers." Upping the ante TPR's actions against Southern Water are sure to make utility companies sit up in the short term, at a time when the regulator is making noises about upping the ante. In its corporate plan for 2018-21, published in May, the pensions watchdog said it plans to increase its headcount by 12 per cent to 660 people, as a result of its increased workload and remit. It estimates a budget of £88.7 mil- lion for 2018/19, an increase of 5.2 per cent when compared with the previous year. But given the scale of the task in hand, it remains to be seen whether utilities as a whole and water companies in particular will make any meaningful effort to redress the pension/dividend balance. Lind speculated that long-term pressures on their finances mean it is highly likely we'll soon see another company fall foul of the regulator. "All companies are under pressure to pay high dividends, but water companies need to show they're working for everyone" MANBIR THANDI, DIRECTOR, DWF "It is not Ofwat's role to regulate how much companies should pay in to their pension funds" RACHEL FLETCHER, CHIEF EXECUTIVE, OFWAT "The bigger threat to dividends is probably the tougher regulatory conditions looming over the horizon" GEORGE SALMON, EQUITY ANALYST, HARGREAVES LANSDOWN "We are ending the profiteering in dividends, vast executive salaries, and excessive interest payments" JOHN MCDONNELL, SHADOW CHANCELLOR

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