Personal Pension  

FTSE 100 firms with pension deficits under fire

FTSE 100 firms with pension deficits under fire

Analysis from platform AJ Bell shows 35 FTSE 100 firms paid out a bigger sum in dividends than the size of their pension deficit in 2015.

A total of 54 FTSE 100 companies who have funding deficits on their staff pension schemes paid out a total of £48bn in dividends a year for the past two years.

This is almost equal to the total deficit of their pension schemes, which stood at £52bn.

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According to Russ Mould, investment director at AJ Bell, the analysis raises questions over whether public companies have got the right balance between shareholder payouts and funding for their staff pension schemes.

Mr Mould revealed his calculation as retailer Philip Green faced an interrogation by the work and pensions select committee about the BHS pension scheme deficit.

Total deficit 2014

Dividends paid by those in deficit

 

2014

2015

2016E

£52 billion

£48bn

£48bn

£49bn

 Source: AJ Bell

Mr Mould said the collapse in interest rates and bond yields to record lows for a sustained period of time had contributed to substantial pension deficits for many firms and this had been brought into stark focus by the plight of BHS and Tata Steel in recent weeks.

He said: “Management teams face difficult decisions around how to allocate capital to ensure profitable growth and sustainable shareholder payouts. Emerging holes in their pension schemes add another difficult dimension, but it is one that they cannot ignore.

“Dividend cuts and underinvestment in the business are perhaps more obvious actions senior executives want to avoid.

“However, insufficient contributions to the pension fund could leave the company with hefty liabilities, which could drag on future performance and ultimately lead to staff receiving lower pensions if the business runs into difficulties and enters administration.

“With prospects for higher bond yields and interest rates looking slim, there is a huge question for companies to answer around whether they are adequately funding their pension schemes in order to sustain the future pensions of their workforce.”

Adviser view

Colin Rodger, director of Edinburgh-based Alexander Sloan Financial Planning, said: “Many defined contribution schemes, including incidentally BHS, have put in place recovery plans which commit the employer to making considerable additional sums over and above the normal employer contributions. The recovery plans are aimed at reducing or eliminating the deficit over a period, which can be typically 20 years.

“If a company opted to cut its dividend in favour of immediate deficit reduction, the consequence of cutting the dividend could be very harsh on the share price in the short term, so management is understandably reluctant to take this course of action.”

ruth.gillbe@ft.com