Sarah Wilson, chief executive of Minerva, the shareholder adviser, said: “At a time when innovation and [research and development] is so important it would seem that financial engineering is taking a higher priority.” – Financial Times 

Employers looking for an easing of their deficit funding plans should be reminded of their recent payments of dividends.

In the past decade through a combination of share buy-backs and reckless dividend payments companies who had reported sitting on a cash mountain are now claiming vulnerability as a result of the pandemic.  Some executives pleading to the Pensions Regulator will be met with stern faces as the facts behind the erosion of this capital base become apparent.

A report from Sheffield University, Queen Mary’s in London and the Copenhagen Business School, found that  28 per cent of FTSE 100 companies, 37 per cent of S&P 500 firms and 29 per cent of the S&P Europe 350 paid out more in shareholder distributions than they generated in net income in the last available accounting year.

Sarah Wilson is right to call this Financial Engineering as these behaviors trigger excess reward to those setting dividend rates.  These executives know full well high dividends lead to high share prices and trigger big bonuses.

While Make My Money Matter focus on the E in ESG, it is right that organisations like Minerva continue to pick up on egregious behavior of this kind. It is from their work that trustees can make meaningful decisions when voting and how to construct their statements on ESG that due to become a legal requirement when the Pension Schemes Bill gets Royal Assent.

I am sure this is not lost on Josephine Cumbo

Dividend excess puts companies at greater risk of collapse https://t.co/DKjWKK01pl via @financialtimes

— Josephine Cumbo (@JosephineCumbo) July 6, 2020

This is why the corporate G in ESG is so important to pensions. The balance of equitable interests between pension funds, sponsors and the taxpayer is not best served by financial engineering which massages reward for the few at the expense of the many.

Inter generational fairness on pensions

Commenting on yesterday’s blog in which I promoted alternatives to the Pension Regulator’s DB funding code, Derek Scott made some observations which carry the weight of his being chair of the trustees at the Railways Pension Fund and latterly at Stagecoach.

Inter-generational fairness is hard to achieve without margins of safety on both sides. Even inter-generational fairness is seldom achieved if high earners with higher expectations of salary increases and longer longevity are lumped together in the same open scheme. This is where I have particular sympathy for the Keating & Clacher proposals into CARs being applied to test the real, lifetime costs of higher paid people’s pensions.

If we look at the pension incentives on senior executives they are weighted to keeping pension schemes solvent not just because many are in these schemes (and risk serious hair cuts from the PPF) but because the scheme emperils the sponsor and the sponsor’s executive. We have seen with the  BHS and British Steel Pension Schemes, expensive restructuring (known as regulatory apportionment agreements) designed to keep schemes and companies out of the PPF and insolvency respectively.

The cost of keeping the scheme open falls on generations of workers who do not benefit from the defined benefit scheme who are prone to losing their jobs or seeing their remuneration fall to financially immunize the senior management.

While I am all for schemes staying open where they can, I am not for RAAs which carry the inequalities of the financial engineering identified by Sarah Wilson.

If we are to take pension governance as an aspect of ESG, we need to consider the fairness of the pension promise to everyone and not protect schemes because those who have most to lose from their falling into the PPF are those negotiating with tPR.

While the Pensions Regulator has a duty to protect the PPF, well run schemes like BSPS and to a degree BHS, are not likely to damage the PPF’s sustainability. The PPF as a superfund has much to offer a member and – as importantly, those generations of worker for the sponsor who have no accrued rights in the scheme and rely on AE workplace pensions.

This is why the G in pensions governance is so important to ESG.