Following an investigation by The Pensions Regulator (TPR), Southern Water will pay an additional £50 million into its pension scheme with accelerated payments over a shorter recovery period.

TPR, the regulator of work-based pension schemes in the UK, said it took action over what it felt was an imbalance between the funds contributed to the Southern Water Pension Scheme and the level of dividends paid to shareholders in 2016 and 2017.

A new report published by the regulator says 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. TPR considered this amounted to unfair treatment of the scheme.

TPR began regulatory proceedings and issued a Warning Notice to the trustee and company to say it was seeking to exercise its section 231 funding power over its concerns about the level of payments to the scheme, and later opened an anti-avoidance investigation following the dividend payments by the company.

As at 31 March 2016, the date of its last triennial valuation, the scheme had an ongoing deficit of £252 million.

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. It believed the employer could pay more into its scheme, which has 4,000 members, resulting in a shorter recovery plan and a reduced level of risk.

The company intended to pay dividends of approximately £210 million between 2015 and 2020. At the same time it proposed halving its annual deficit recovery payments (DRCs) from c£20 million to c£10 million a year.

The investigation has helped bring about a settlement which will now see Southern Water pay £50 million more money into the scheme over a shorter recovery plan period. Initial payments will be up to twice as much as before, with every subsequent payment also higher.

A dividend sharing mechanism will ensure future dividend payments do not lead to unfair treatment of the scheme.

The report sets out exactly how much more will be paid into the scheme, and when the payments will be made.

Nicola Parish, TPR’s Executive Director of Frontline Regulation, said:

“We are pleased Southern Water and the scheme trustees have taken on board our concerns and that a strong outcome has been agreed.

“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.

“We are clear that we will take action where we see substantial dividends with low scheme contributions and long recovery plans. Whilst we began an investigation using our section 231 funding power, in the end we did not have to fully exercise the power as we obtained a strong settlement ending uncertainty and avoiding a potentially lengthy litigation process.”

Southern Water has now introduced a dividend sharing mechanism, which means that if dividends are paid to shareholders above a certain threshold the company will increase the amount it pays into the pension, ensuring the scheme shares more fairly in the company’s success.

In June 2017 TPR issued a Warning Notice to the water company looking to exercise its 231 powers under the Pensions Act 2004. This would allow it to impose a new recovery plan.

Later in 2017 the scheme’s trustee reported that it and the employer had failed to agree the now overdue 2016 valuation.

In late summer of 2018 the trustee submitted a proposal for the 2016 valuation which addressed TPR’s long-held concerns for the scheme. TPR agreed to stop legal proceedings against the scheme’s sponsoring employer if the proposal was formally agreed. Necessary documentation confirming agreement by Southern Water and the trustee was submitted to TPR in October.

In a statement, Southern Water said:

"Our shareholders (who are mainly themselves pension funds) have supported the introduction of a sharing mechanism such that deficit repair contributions will increase with dividends."