The Pensions Regulator has publicly rapped for the first time a water company for prioritising investor dividends over the pensions of its employees.
Southern Water, which supplies 4.6m customers in Kent, Sussex, Hampshire and the Isle of Wight, has agreed to pay an additional £50m into its pension fund over a shorter period after being threatened with formal enforcement action by the regulator.
The regulator’s action comes amid growing frustration across the political spectrum with the 10 privatised regional water monopolies, which have continued to deliver generous rewards to shareholders and executives despite failures on leakage and pollution. The opposition Labour party has pledged to renationalise the industry.
Southern Water’s owners, a consortium of investors including UBS Asset Management and JPMorgan Asset Management, received a total of £190m of dividends in 2016 and 2017, part of a wider plan to extract £210m between 2015 and 2020. At the same time they almost halved annual contributions to the pension scheme to £10m a year between 2016 and 2019.
The defined benefit scheme, also known as final salary, has 4,000 members and its most recent three-yearly valuation in March 2016 showed a deficit of £252m.
The pensions watchdog said it believed that Southern Water’s scheme members were “being treated unfairly relative to the company’s shareholders, despite us having raised the issue with them in previous discussions”.
Following the regulator’s intervention, Southern will pay £223.5m into its pension scheme over 12 years compared with £170.5m under its old plan.
The watchdog revealed that it had taken steps to formally force the company to make a cash injection into its pension fund, but dropped this action after a settlement was reached.
Other water companies have also been cutting back on staff retirement benefits while maintaining high dividends to shareholders.
United Utilities, the stock market listed water monopoly that supplies the north-west of England and parts of Wales, cut back on benefits for retirees earlier this year, despite having a pension surplus of £220m in September 2017.
In November, United announced a 3.9 per cent increase in dividends, an estimated £280m for shareholders this year, on the back of an inflation-busting increase in water bills for customers. Steve Mogford, its chief executive, has received £4.2m in pay and benefits over the past two years.
The private equity-owned Anglian Water, which supplies the east of England, first closed its DB pension scheme to new members in 2002. But it is now moving all current and former employees into a defined contribution scheme with reduced benefits. Anglian had a £279m pension deficit at its latest valuation one year ago. But it paid £128m in dividends in 2016/17, while Peter Simpson, its chief executive, earned £1.5m during the period.
The regulator declined to comment on whether it was investigating any other companies for prioritising shareholders over its pension scheme members.
Martin Blaiklock, an independent infrastructure consultant, said the news provided further proof that “benign sector regulators were watching impassively as current and future pensioners get short-changed”.
Southern Water said: “We are pleased to have completed negotiations for our final salary pension scheme and an updated plan is now in place. Given the increased pension deficit we have agreed to increase contributions to ensure that members’ interests continue to be our priority.”