Thames Water has not yet agreed the 2022 valuation of one of its defined benefit pension schemes that has a deficit of over £150m, it said in its latest annual report published on Tuesday. The troubled utility company is in discussions with trustees and the Pensions Regulator to finalise the valuation. 

The Thames Water Pension Scheme has not yet concluded an actuarial valuation as at 31 March 2022. The roughly £1.1bn TWPS, closed to accrual, has a deficit of £152.1m. A second DB scheme, the £523m Thames Water Mirror Image Pension Scheme, is in surplus by £33m and had its valuation agreed in March this year.  

“Discussions are continuing with the trustee and the Pensions Regulator to complete the triennial valuation for TWPS, which is now significantly overdue,” the company said about the delayed valuation, noting it “could result in increases in company contributions”. 

A spokesperson for the Thames Water Pension Scheme said: “The trustees are working closely with Thames Water to finalise the valuation and the schedule of contributions due to the scheme. The trustees have kept the Pensions Regulator updated on the discussions and will continue to liaise closely with all stakeholders, as they continue to work to protect members’ interests.”

A TPR spokesperson said: “We are in regular contact with the trustees of the pension scheme as part of our role in protecting savers.” 

 

After the 2019 valuation, Thames Water agreed to a recovery plan which would see the pension deficit eliminated by 2027. Following a deficit contribution of £69.7m covering 2021 to 2024 and £7.3m paid in 2024, for subsequent years until 2027, the company expects to make recovery payments of more than £30m a year. 

Pension contributions require cash. Thames Water contributed £48.5m to pensions in the year to March 2024 – up from £9.2m in 2023 – with £47.5m of these contributions paid by Kemble Water Eurobond plc. Two interim dividends were issued in March 2024, in part “to enable... Kemble Water Eurobond plc to make pension contribution payments to the Thames Water Pension Scheme and Thames Water Mirror Image Pension Scheme defined benefit schemes on behalf of the company”. 

The valuation delay comes against a backdrop of a sector under pressure. Thames Water failed to attract new investment from its shareholders in March this year amid uncertainty over whether regulator Ofwat will allow the firm to substantially raise prices like the utility has proposed. The firm said on Tuesday that this “has resulted in credit rating downgrades, a liquidity runway of c.11 months and forecast trigger events in our 2024/25 financial covenants”. Auditors found “material uncertainty” related to going concern. 

When a valuation is overdue, it can cause problems for the Pensions Regulator, said Rosalind Connor, partner at law firm Temple Bright, because its powers are not very strong in this area. 

TPR can issue a fine for non-compliance of up to £50,000 for corporates and up to £5,000 for individuals, but this might be too little to make a difference – or on the other hand, a company might simply be unable to pay up.  

The other power the regulator can use in these cases is to impose its own valuation. However, Connor questioned if the latter power has ever been used. The regulator, although it employs actuaries, is unlikely to have the software and systems in place that an actuarial firm has and might need to pay a third party to conduct the valuation, she opined, an expense it would likely try to avoid. 

If a valuation is late, the regulator will usually ask for a further date and press the scheme and company until the valuation has been submitted, Connor said. 

“It tends to use nudging and sometimes fine people, it certainly threatens to,” she said. 

The problem with issuing a fine where a sponsor is in financial difficulty remains though – the money might never be forthcoming.  

“If you have got a scheme that is not well funded and there isn’t enough money, there is not an easy answer,” Connor said. “Although the regulator is likely to be asking questions about how it will be dealt with, it’s not like there is a great solution.”  

The Pensions Regulator explained that under certain circumstances, its power under section 231 of the Pensions Act 2004 allows it to modify a scheme with regard to future accrual of benefits, to direct how the technical provisions are to be calculated, how any failure to meet the statutory funding objective is to be remedied or to impose a schedule of contributions throughout the period of a recovery plan.  

It added: “When using our s231 powers, we will also consider our statutory objective of minimising any adverse impacts on the sustainable growth of the scheme employer.” 

A valuation delay could have different reasons. At Thames Water, it could be for the reasons widely reported on, or something completely different, one trustee who preferred to remain anonymous said. How TPR reacts will partly depend on what is causing the delay.  

“They have certain powers, many of them untested in reality. Often they just come in and apply pressure either on the trustees or the company to do something,” they said, while in other cases the regulator might be more lenient.  

TPR is likely aware of the issues in the water sector. The trustee said, however, from a pension scheme’s point of view, water companies have a robust covenant. They operate infrastructure of national importance, and so the government is effectively guaranteeing their continuation. 

Compared with other companies therefore, "the covenant is a very different beast because they have to continue to operate, and there are real assets that sit behind this”, they said. 

Nonetheless, trustees at the Thames Water scheme will be in an unenviable position given the attention the company is receiving from the media, regulators and politicians. In a situation like this, trustees should give TPR “a heads up” and be transparent, while asking the sponsor to also be open, yet avoiding a fight. “You need to stand your ground,” the trustee advised. 

Should the worst happen, a special administration regime applies for regulated entities such as Thames Water, although Prime Minister Keir Starmer reportedly said that Labour would not want to see the firm nationalised.

Recent changes to the SAR mean that, were the water company to go into administration, the repayment of any government funds which were provided to enable the running of the administration takes priority, ahead of other creditors. This could mean a firm's own pension schemes are at risk of getting less than they bargained for, noted law firm Squire Patton Boggs in February.