Most FTSE 100 companies could clear their pension deficits in less than two years by withholding dividends, new research says. Experts have called for more focus on the contrast between dividend payments and deficit repair contributions, though others say there is no one-size-fits-all solution.
From consolidation to partial transfers, the rising cost of providing defined benefit pensions has sparked countless discussions as to how funding gaps can be closed. As pension contributions fall behind increasing dividend payments, the deficit debate is set to continue.
A balance needs to be struck between paying dividends and repairing deficits, with each case being considered individually, rather than blanket rules
Baroness Ros Altmann
According to JLT Employee Benefits’ analysis of the accounts for FTSE 100 companies, published up to June 30 2016, the amount contributed to blue chip company pension schemes over the year was £13.2bn, while the total dividends paid by those with DB pension funds amounted to £68.5bn.
The research found that 53 FTSE 100 companies are able to settle their DB deficits in less than two years by withholding dividends, while 46 could clear their pension deficits with a payment of up to one year's dividends.
Only six FTSE 100 companies have spent more in contributions to their DB schemes than to their shareholders during the reported period.
Charles Cowling, director at JLT, said that although there are some companies in real difficulties, “it’s good to see” that the majority of blue chip companies “are able to manage their deficits” – something which “comes out very clearly when you look at the dividend analysis”.
This, he said, is “encouraging, because there are lots of scare stories about pensions bringing down British industry”.
More focus needed on dividend payments
Steve Webb, director of policy at provider Royal London and former pensions minister, said the contrast between dividend payments and deficit repair contributions “is an area that needs looking at”.
However, Webb said he “would not advocate firms… shovelling every pound that would have gone in dividends into their pension funds, because there is always a knock-on effect”.
He said that despite fewer DB assets being invested in UK equities, forcing companies to slash their dividends would still “have an impact on the funding of pension schemes”.
Source: JLT Employee Benefits (figures based on accounts for 2015-16 published before June 2016)
He noted that it is important to think about the attitudes of those who hold the shares, and whether cutting dividends would make it more difficult for businesses to raise money on the stock market.
Webb highlighted that “with DB scheme funding you can never generalise… you need to look scheme by scheme, employer by employer and industry by industry”.
He said that a “great sledgehammer” approach to banning the payment of dividends until deficits have been cleared would be ill-advised. “I think that would be very risky and dangerous,” he said.
There is no blanket solution
Similarly, Webb's successor and former pensions minister Ros Altmann said she believes “a balance needs to be struck between paying dividends and repairing deficits, with each case being considered individually, rather than blanket rules”.
She observed that some companies have paid large deficit reduction contributions “and then found the deficit has still increased further, so the contributions did not solve the problem”.
Ultimately, “the important support for pension schemes is a viable ongoing sponsor – some will be strong enough to withstand a dividend default, but others may not recover from this so easily”, said Altmann.
Bob Scott, partner at consultancy LCP, said that the BHS pension scandal “has certainly focused people’s minds on the possibility of companies paying large dividends, and shareholders extracting significant value from companies, which then have a pension scheme that falls into disrepair”.
He noted that FTSE 100 companies receive significant public scrutiny and said he takes comfort from the fact that “their liabilities are, on the whole, reasonably affordable”.
Consolidation and partial transfers put forward as funding pressures increase
Defined benefit funding levels have not improved over the past years as gilt yields have fallen, the latest edition of the Purple Book shows, with industry figures hailing partial transfers and scheme consolidation as possible solutions.
The problem is more significant when it comes to smaller, unquoted companies, Scott noted. He said the Pensions Regulator might start to take greater interest in companies with long recovery plans, late valuations and substantial dividends to shareholders.
PPF deficit figures presage hard times for funding and dividends
Following the Pension Protection Fund’s news of yet another record deficit in defined benefit pensions, many schemes can expect to gear up for challenging funding negotiations, amid growing fears for company dividends.
Dividend cuts could have adverse impact
“To my mind, little is to be achieved by the proposed diversion of dividend income,” said Ian Neale, director at Aries Insight.
He said: “In fact, the consequences are likely to be adverse, because cutting the dividend is something company boards are very reluctant to do because it usually has a negative impact on the share price and therefore what a company is worth.”
"It may set up a feedback effect with non-pension scheme investors selling their shares," he added.
