Trustees must reassess their employer covenant as financial data provider Markit expects dividend payouts to increase by 18 per cent per year, warns Punter Southall.

The news is particularly relevant to defined benefit (DB) pension scheme trustees, who are positioned to monitor the financial strength of their sponsoring employers and consider impacts that corporate actions, such as dividend payments, may have on their employer covenant, as outlined by the Pensions Regulator.

"It appears that spring may have arrived for many investors in UK companies after the long and harsh winter of economic downturn spilled with profit warnings and dividend cuts," commented Lorant Porkolab, senior consultant in Punter Southall Transaction Services' Covenant Consulting practice. "The question - whether these green shoots reflected by the higher dividend expectations will also benefit the companies' pension schemes who were often told over the last two years to accept less contribution and share the burden with shareholders - remains to be seen."

An increase in dividend payment can, Porkolab said, be a sign of improving financial health and profitability for a business, and be welcome by stakeholders.

"There is no doubt that paying dividend is a normal course of action for most corporate entities. However from the pension scheme's perspective, returning capital to shareholders, for instance in the form of dividend, has the potential to weaken the covenant provided by the sponsor to the scheme. Trustees should fully understand the underlying circumstances of any dividend payment and its impact on the scheme."

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