Companies with large defined benefit pension deficits have been warned by The Pensions Regulator that dividends might have been to put on hold if they are under financial pressure amid efforts to recover from the pandemic.

Less than 200 pension schemes have asked to reduce or postpone their deficit contributions since April last year. However, with the Government looking to wind down its support to businesses, pension trustees will be under greater scrutiny.

‘The Pensions Regulator’s call for companies to avoid dividend payments if they are still recovering from Covid-19 and have pension obligations could affect the boardroom’s willingness to sanction dividend payments, for fear of public or regulatory backlash,’ cautioned Russ Mould, investment director at AJ Bell.

David Fairs, executive director for regulatory policy, analysis and advice at The Pensions Regulator, said: ‘Trustees should remain vigilant as we emerge from the worst of the pandemic, there is still a lot of uncertainty and there could well be an increase in insolvencies.’

For companies hit hard by Covid, but which are recovering, there could be some short-term affordability constraints, according to Fairs. He added that trustees should consider any requests to lower contributions and said: ‘We expect any request to be short term, and we want to see higher contributions in subsequent years.’

For firms still feeling the impact of Covid, trustees may need to be flexible, but the pension scheme should not be the only creditor feeling the pain, according to Fairs. ‘They should be treated fairly among other creditors. Dividends may need to be put on hold. Robust risk management is essential.’

In 2020 the Bank of England’s Prudential Regulatory Authority banned the payment of dividends by the banks in order that they build up their capital reserves to support their customers.

Insurance companies were advised by the regulator to suspend dividends, but the bigger firms weathered the storm well enough to be able to maintain their payouts.

For many investors in insurers, dividends make up a key part of their attraction.

According to data from SharePad, just under half of the companies in the FTSE 100 index have a pension deficit, with seven firms carrying multi-billion-pound liabilities.

Of the seven firms – Astra Zeneca (AZN), BAE Systems (BA.), BT (BT.A), GlaxoSmithKline (GSK), Phoenix Group (PHNX), Royal Dutch Shell (RDSB) and Tesco (TSCO) – six paid dividends for the 2020 financial year.

BP, GlaxoSmithKline and Shell have already paid or declared their first quarter dividends for this financial year.

DISCLAIMER: AJ Bell is the owner and publisher of Shares magazine. The author Ian Conway and editor Daniel Coatsworth own shares in AJ Bell.

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