The Pensions Regulator (TPR) has warned sponsors against prioritising dividend payments over contributions where there is a significant scheme deficit.
The watchdog said it would launch investigations where it believes defined benefit (DB) sponsors' contributions are too low while payments to shareholders suggest "the employer has greater affordability".
The warning was issued in TPR's annual funding statement, published today (15 May), which also revealed it has classed 1 in 20 sponsors of DB schemes undergoing triennial valuations this year as "tending to weak" or "weak". The classifications mean the sponsor is at risk of becoming unable to or already unlikely to adequately support the scheme.
Although the regulator said the risk of these firms becoming insolvent this year was not inevitable, it suggested it would keep a watchful eye to ensure DB schemes were not being hung out to dry.
Where dividend payments are higher than deficit reduction contributions, TPR expects schemes to have short recovery plans with appropriate investment strategies which do not "rely excessively on investment outperformance".
"Where this is not adhered to, we will consider opening an investigation to assess whether the levels of contributions being paid to the scheme are too low and whether the level of payments to shareholders suggests that the employer has greater affordability," the watchdog wrote.
AJ Bell senior analyst Tom Selby said it was important TPR took a balanced view.
"The shadow of Philip Green and BHS looms large over TPR'S barely-disguised threat to companies paying out handsome dividends while failing to close gaping pension deficits," he said. "Clearly, there is a balance to be struck here - dividends are the lifeblood of the UK economy, and a significant reduction in payouts would potentially have far-reaching consequences for investment and growth.
"However, company bosses have been put on notice that pension scheme members cannot be treated as second-class citizens when it comes to allocating resources."
TPR's warning comes after JLT research in January found that more than half of FTSE 100 companies could close their DB deficits by redirecting dividend payments into the scheme for at most two years.
Willis Towers Watson head of pension scheme funding Graham McLean said the regulator needed to be clearer on the length of a "short recovery plan", but added trustees will need to be tough in their triennial negotiations.
"Wherever the line ends up being drawn, the message is clear: the regulator thinks some companies should be paying a lot more into their pension schemes and a lot less to shareholders," he said.
"One reason the regulator is taking such a strong line may be that existing plans to repair deficits are generally not on course. Many schemes embarking on fresh negotiations face remaining in deficit for a lot longer unless employers did deeper."
TPR also warned it would step up action against schemes which failed to submit their valuations on time, after 10% of DB schemes missed their deadline last year.
TPR has been ramping up its interventions over the last year following the collapse of BHS, with it last month promising "focused, faster and more frequent" action where schemes are underfunded or it suspects avoidance.
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