I will carry on and answer the question from the noble Lord, Lord Flight, and then I will answer the question asked by the noble Baroness, Lady Drake.
The noble Lord, Lord Flight, asked what the Government are doing to reform the UK’s dividend regime. The Department for Business, Energy and Industrial Strategy is considering the case for requiring companies to disclose information about their distributable reserves from which dividends are paid. The Institute of Chartered Accountants in England and Wales has been asked to provide technical advice and options for
doing so. It is expected to report shortly. Sir Donald Brydon’s recent independent review into the quality and effectiveness of audit recommended that directors make a statement that the proposed dividends would not threaten the existence of the company and are within known distributable reserves, and, in some circumstances, that the distributable reserves should be subject to audit. Further consultation on this is expected later this year. The department has welcomed the Investment Association’s recommendation to companies that they should publish a dividend policy setting out the board’s long-term approach to making decisions on the amount and timing of return to shareholders.
In answer to the question asked by the noble Baroness, Lady Drake, yes, notifying is different from stopping. We do not want to stop them; we want to focus on ensuring that an appropriate recovery plan is in place. Things can be put right.
The noble Baroness, Lady Bowles, asked how the Pensions Regulator knows what resources the employer has and whether a recovery plan is appropriate. In assessing the appropriateness of a recovery plan, the Pensions Regulator looks at the strength of the employer covenant, which is a measure of the ability of a scheme’s employer to support the scheme now and in future. The regulator takes account of a range of employer-specific information, including underlying trading strength and trajectory, profits, cash flows, debt structure, market risks and opportunities, asset strength, and insolvency risk. This can come from a range of sources including statutory accounts, publicly available information such as credit ratings, market analysts’ views, sectoral analysis and analysis performed by the trustees, the employer or its adviser. The regulator will also focus on how a company uses the cash flow it generates to assess whether a scheme is receiving an appropriate and fair share of these amounts. Greater clarity will be provided through the provisions we are proposing in the Bill, and the regulator intends to set clearer guidelines on recovery plan length and structures for schemes in different circumstances. This will help to improve regulatory grip and make enforcement easier.
The noble Baroness, Lady Bowles, also asked how we will ensure that companies with significant available resources address defined benefit pension scheme funding shortfalls more quickly. Most employers do the right thing and treat their schemes fairly, but we know that this best practice is not universal and that some employers are not devoting a fair proportion of available resources to paying down deficits. We are determined to do something about this.
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The Pensions Regulator already takes action to ensure that sponsoring employers treat their defined benefit schemes fairly, but with the help of the measures in this Bill, the regulator can and will be tougher. The regulator is consulting on a revised funding code, which will set clear expectations on what recovery plan lengths and structures are acceptable, and we are taking a power to set out more clearly in secondary legislation what is required for an appropriate recovery plan. We will work closely with the regulator during the consultation and ensure that our regulations support
its ability to take action against employers that do not pay a reasonable proportion of their available resources to bringing down any pension scheme deficit.
In the absence of detailed evidence as to why it is essential in the circumstances of the employer, the regulator is unlikely to recognise a need to pay dividends as reasonable justification for an overly long recovery plan. Where an appropriate recovery plan is not agreed, the regulator will consider using its powers to impose a suitable recovery plan, so that the scheme gets a fair share of the available resources.
The noble Baronesses, Lady Drake and Lady Sherlock, asked whether we should prevent dividend payments going to shareholders outside the UK. According to the latest ONS figures, nearly 54% of the value of shares in UK quoted companies are held by investors outside the UK. There are no grounds for treating overseas and domestic shareholders differently. The UK would be a significantly less attractive economy in which to invest if foreign shareholders enjoyed lesser rights than UK shareholders.
The noble Baroness, Lady Sherlock, asked about the ratio of dividends to ERCs. I am advised that we will write to her on that.
I hope noble Lords will recognise that the measures I have outlined to strengthen funding, which are to be found elsewhere in this Bill, are the best way to tackle employers that do not direct an appropriate proportion of available resources to managing the pension scheme deficit. As such, I urge the noble Lord to withdraw his amendment.