The UK pensions regulator has warned it will take a tougher line on companies that prioritise shareholder dividends over reducing pension deficits.

In a statement published on Monday, the regulator said it would focus on “fair treatment” when it reviewed funding plans from schemes undergoing pension valuations this year. “We are likely to intervene where we believe schemes are not being treated fairly,” it said.

In the UK, about 11m people are members of private sector “defined benefit” pensions schemes. In retirement, they will be dependent on their employer for income.

But pressures on the 5,800 companies that have this type of scheme have increased as pension deficits have grown to £530bn, largely because low interest rates have inflated liabilities.

“We expect schemes where an employer’s total distribution to shareholders is higher than deficit reduction contributions being paid to the pension scheme to have a relatively short recovery plan and that the recovery plan is underpinned by an appropriate investment strategy that does not rely excessively on investment outperformance,” the regulator said.

“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 regulator also said scheme trustees needed to ensure that employers’ legal obligations to the pension scheme were recognised ahead of shareholders, who had no legal entitlement to dividends.

An analysis published this year by consultancy JLT concluded nearly half of all FTSE 100 companies could have cleared their pension deficit with payment of one year’s dividends.

“It has been a concern to the regulator for many years that dividend payments have been too high compared with pension contributions but, as far as we are aware, they have not used their scheme funding powers,” said Graham McLean, head of scheme funding with Willis Towers Watson, the actuarial consultants.

“They are now signalling they are prepared to intervene in future, and today’s funding statement does follow recent scrutiny of the regulator by a parliamentary select committee.”

The regulator also acknowledged that “many” schemes undergoing valuations this year were likely “to show larger funding deficits”, necessitating contingency plans in case a “downside risk materialises”.

However, its analysis also found that 85-90 per cent of schemes were backed by employers who could manage the deficit.

The regulator’s analysis also indicated about 5 per cent of DB plans were “stressed” with employers who were “weak, tending to weak” or at risk of not being able to support the scheme.

“It is striking that the regulator has put a percentage on the number of stressed schemes,” said Darren Redmayne, chief executive of Lincoln Pensions.

“I think it is time for members to know if they are a member of a scheme that is in trouble. You would want to know if you were one of the 5 per cent.”

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