Defined Benefit  

FTSE 100 firms choose dividends over DB funding

FTSE 100 firms choose dividends over DB funding

Just five FTSE 100 companies have paid more into their pension schemes in the year to March than they declared in dividends to shareholders, new research has revealed.

Data from JLT Employee Benefits showed the total FTSE 100 defined benefit (DB) pension scheme deficit stood at £33bn as at 31 March 2018, a £2bn drop from the previous year.

While the country’s 100 largest companies committed significant capital to improving scheme funding over the past year, JLT noted 37 companies could have settled their pension deficits in full had they channelled one year of shareholder dividends towards the cause.

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Charles Cowling, chief actuary at JLT Employee Benefits, said: "The inherent tension between funding pension obligations and paying dividends persists across the UK’s blue-chip index, but the tide is starting to turn among some sponsors."

JLT found 53 companies had made significant funding contributions in their most recent annual reports and accounts as they sought to offset balance sheet risks with cash injections.

A total of £14.8bn was paid into schemes over the year across all FTSE 100 companies, down from £17.4bn in the previous year, a 14.9 per cent decrease. Because the cost of benefits accrued during the year amounted to £6.6bn, this amounted to funding of £8.2bn towards reducing scheme deficits.

Many of Britain’s largest DB scheme sponsors have come under fire in recent years for continuing to pay dividends to shareholders while allowing their pension scheme funding positions to deteriorate.

Earlier in 2018, Frank Field MP, chair of the Work & Pensions select committee, launched a probe into the closure of the Anglian Water and United Utilities defined benefit (DB) schemes after Ofwat told the companies to save money.

In response, Mr Field said: "There appears to be no effective restraint on these firms' policy of distributing massive sums to shareholders while cutting the pension benefits that their employees are counting on for their retirement."

However, Mr Cowling took a more positive view, saying that improvements are slowly being made.

He said: "It is encouraging to see schemes acknowledging the balance sheet risks presented by unfunded pension obligations and taking action to shore up their position. The companies with the biggest pension funding problems are slowly getting to grips with it.

"Corporate sponsors are committing significant capital to their pension scheme through cash injections and are clearly weighing up the need to return value to shareholders against improving their funding position."

DB pension scheme fund deficits continue to be a major concern despite recent improvements.

Data from the PwC Skyval Index, which measures the health of about 5,800 pension funds in the UK, found the deficit across all funds stood at £170bn in August 2018, down from £180bn the previous month.

Steven Dicker, chief actuary at PwC, said: "The reduction in deficit is mainly attributable to strong asset performance. However, as economic uncertainty rumbles on, it’s not clear how long this positive trend will hold up."