Ofwat expects water companies to meet customers’ obligations and “take fair account” of employee interests before making dividend payments.
The regulator’s chief executive, Rachel Fletcher has responded to a letter from Frank Field MP, in which he accused water companies of paying “massive sums” to shareholders while cutting their workers’ pensions benefits.
The chairman of parliament’s work and pensions committee raised concerns about plans by Anglian Water and United Utilities to close their defined benefit scheme to future payments.
Field highlighted “the Anglian Water schemes currently have an £86 million deficit on an IAS19 accounting basis while the United Utilities pension scheme has a £220 million surplus on this basis”.
In Fletcher’s letter, dated 12 April, she writes: “Ofwat is concerned that some water companies have been more focused on boosting returns than on serving their customers and fulfilling the special responsibilities that go with being a monopoly provider of an essential public service.”
She highlights the regulator recently launched an “ambitious programme” of reforms to get the sector “back in balance”, which will sit alongside a “tougher regulatory settlement” from 2020 onwards.
“While we have no direct role in regulating the pension arrangements water companies have in place, part of this package involves an expectation that boards first meet their obligations to customers and take fair account of employee interests before making dividend payments, and that executive bonuses should be linked to delivery of exceptional performance to customers,” she writes.
However, she stresses she has not “sought to address the factual details of the decisions taken by Anglian Water or United Utilities, either on pensions or distributions to shareholders.”
The changes to the accrual arrangements, which unions claim could cost younger workers up to £10,000 per annum in lost retirement income, have already resulted in hundreds of staff striking at United Utilities last month. Staff at Anglian are also planning industrial action to protest against their company’s pension shake-up plans.
Fletcher writes: “While we believe it is appropriate that companies should take account of pension obligations when making dividend decisions, we make no judgement about the appropriateness of companies closing their defined benefit schemes to future accruals, and it is not Ofwat’s role to regulate how much companies should pay in their pension funds.”
Field also referred to Ofwat having granted water companies leeway in 2014 to recover some of the costs of deficit repair contributions through customers’ water bills until the early 2020s.
In Fletcher’s response, she states: “The approach which Ofwat established at its 2009 price review and extended in 2014 related to our expectations that companies should take responsibility for managing their pension deficits and not expect customers to fund repair costs beyond those amounts and periods provided for in our 2009 price review.
“We have been clear that shareholders would bear the full costs of any growth in deficits since 2009 valuations. We do not expect that decisions by companies to close their schemes to future accruals will reduce their exposure to funding the deficit repair costs as they stood when our approach was agreed.”
“However, we will continue to monitor developments to ensure that customers are not funding costs which should be borne by shareholders,” the letter says.