News that the Pensions Regulator is to allow the sponsors of final salary schemes to renegotiate pension recovery plans may be of some comfort to income seekers – but only over the long term.

The deficits of 7,400 final salary schemes rose to £242bn at the end of March, putting pressure on employers to make fresh cash injections into their schemes in order to keep them in line with recovery plans negotiated with the Pension Regulator and designed to mend deficits within 10 years.

The Pensions Regulator has recognised that the best support for a final salary scheme is a thriving employer, not an insolvent one and has indicated that it will be willing to extend recovery timetables to allow for higher cash payments when the economy improves.

Companies with huge deficits are being forced to divert scarce cash flow from making dividend payments to propping up the company pension scheme.

BT is a case in point. Investors are braced for the first cut in the company’s dividend for seven years because of deep-rooted problems at one its subsidiaries and a large deficit in its pension scheme. The board is believed to be considering the case for slashing the dividend to zero for the second half of 2008-09.

Nick Raynor of stockbrokers, The Share Centre, says that BT’s problems are so serious that the Pensions Regulator’s announcement will make no difference to its decision on the size of the dividend cut. “Decisions on dividend cuts will have been taken already. Slightly more flexibility on the pension front will make little difference to dividend cuts this year, although it may help some companies over the longer term,” he says.

But ailing pension schemes are only one of the burdens facing companies in the economic downturn. Falling profits and difficulties in debt refinancing have already prompted a slew of companies to reduce their dividends, while others with unsustainably high dividend yields must be due for a haircut.

The announcement by Aviva that it would maintain its dividend, despite reporting a 2008 pre-tax loss, was met with a fall in its share price and criticism from market analysts that it was unaffordable.

But not all is doom and gloom. Nick Raynor says that oil, tobacco and utility companies should be able to maintain their dividends due to their defensive qualities. “It’s not rocket science. During the recession, we will still want to drive our cars, heat our homes and relax with a cigarette. A sustainable dividend is more important than a sky-high one,” he says.

Written by PAMELA ATHERTON. Michael Baxter is on holiday.