Personal PensionAug 16 2016

FTSE firms pay billions more in dividends than into pensions

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FTSE firms pay billions more in dividends than into pensions

The UK’s biggest companies paid shareholders five times more in dividends than in staff pension contributions last year, according to a report analysing the state of FTSE 100 pension schemes.

Research published by pensions expert Lane Clark & Peacock today (16 August) revealed FTSE 100 companies had paid contributions totalling £13.3bn into their defined benefit schemes in 2015.

By comparison, the amount paid in dividends hit £71bn last year, which is more than five times the amount paid into pensions.

Back in June, Standard Life fund manager Thomas Moore, who runs the company’s £1.2bn UK Equity Income fund, spoke to FTAdviser about more big UK companies using debt to pay off their dividends.

This growing trend also comes at a time when pension schemes struggle with low interest rates, and last week former pensions minister, Baroness Altmann, urged MPs to launch an inquiry into company pensions.

For the 56 companies in the FTSE 100 which disclosed a deficit, the research uncovered a shortfall of £42.3bn.

These same companies paid dividends totalling £53bn, which is almost a quarter higher.

Bob Scott, LCP’s senior partner, said the increasing cost of defined benefit pension provision has meant that more contributions went towards additional pension accrual than in any year since 2009.

This, he said, is despite the significant number of DB scheme closures, and a material reduction in the number of employees accruing DB pensions.

“Not only is this a drag on company performance and the wider UK economy, but the relatively small contributions going into DC may be storing up problems for the beneficiaries of those schemes when they come to retire.”

The report, called ‘Accounting for Pensions’, also found FTSE 100 companies are putting more than twice as much cash into defined benefit pensions as they are into defined contribution pensions, with contributions totalling £13.3bn compared to £6bn respectively.

LCP said pension scheme deficits have increased since the recent cut in the base rate and the extension of the QE programme, and predicted that pension deficits had risen to £63bn from £46bn between 9 August and the end of July.

Mr Scott said companies should alter the increases applied to their pension scheme from the retail price index to the consumer price index, in order to reduce FTSE 100 pension liabilities by around £30bn.

He also pointed to the collapse of BHS and the potential sale of Tata Steel UK, which both have underfunded pension schemes.

“This highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company.

“Companies with large deficits may see pressure from the Pensions Regulator on their dividend policy in light of the work and pensions select committee’s report into BHS.”

Andrew Pennie, marketing director at Intelligent Pensions, said the report doesn’t paint a particularly rosy picture for defined benefit pensions.

“These schemes are on a hiding to nothing, and the cost of matching their liabilities looks to be going down a one way street – in the wrong direction.

“Clearly, there is a balance between funding pension costs, making profits and satisfying and attracting shareholders,” he said, adding however some companies have also incurred costs in the wake of huge legislative changes, such as auto-enrolment and the pension freedoms.

But Mr Pennie said, particularly following the BHS debacle, it would not be surprising if the regulator looked to intervene where companies are paying large dividends but have a significant pension deficit.

katherine.denham@ft.com