More than half of FTSE 100 companies could clear their defined benefit pension scheme deficits by withholding dividends for up to two years, research by JLT Employee Benefits has revealed.
The workplace benefits consultancy found 53 of the UK's 100 biggest public companies could balance their pension liabilities by channeling profits away from shareholders and towards their employees' retirement funds.
JLT's most recent figures, from December, put the total DB pension deficit at £169bn. Their total liabilities, meanwhile, stood at £586bn, meaning they were 78 per cent funded.
The firm found only six FTSE 100 companies were spending more on DB pension contributions than dividends to shareholders.
It added only seven of the 100 companies would need to withhold dividends for more than two years to ensure their schemes were fully funded.
Over the year to June 2016, FTSE 100 companies poured £6.3bn into their DB schemes, up from £6.1 billion the previous year.
For many companies, it is more efficient for them to borrow in the capital markets than from their pension scheme by running a pension deficit. Charles CowlingBT led the way, contributing £800m, while 49 other FTSE 100 companies also reported significant deficit funding contributions in their most recent annual report and accounts.
JLT Employee Benefits director Charles Cowling argued that withholding dividends would not necessarily push share prices down.
“There is a long-accepted principle of corporate finance known as the capital structure irrelevance principle that the value of a firm is unaffected by how it is financed - in the absence of the impact of taxes, bankruptcy costs and agency costs," he said.
"In particular, this suggests that whilst shareholders clearly value dividends and don’t like surprises, the dividend policy of a firm should not affect its fundamental value.
“Moreover, pension deficits are in principle no different from other forms of debt finance, e.g. bank loans. However, for many companies, pension deficits are an inefficient source of debt finance, in particular, because of corporation tax relief on debt interest costs and on pension contributions.
"So, for many companies, it is more efficient for them to borrow in the capital markets than from their pension scheme by running a pension deficit," he said.
But Darren Redmayne, head of pension covenant consultancy Lincoln Pensions, disagreed, saying withholding dividends could "worsen shareholder value, make UK plcs less investible and negatively impact the businesses supporting the pension schemes".
"There is no requirement to clear a pension deficit as soon as possible. The requirement is to clear it over an appropriate period," he said.
"The real issue here is equity of treatment - are pension schemes receiving their fair share or are companies taking too much risk by over-distributing to shareholders and not staying on top of their pension deficits?"
james.fernyhough@ft.com
