15th June 2016
Fifty four FTSE 100 companies which have funding deficits on their staff pension schemes paid out a total of £48 billion in dividends a year for the past two years according to a new analysis from A.J.Bell. This is almost equal to the total deficit of their pension schemes which is £52 billion.
Thirty-five FTSE 100 firms paid out more in dividends than their pension deficit and, more conspicuously, eight of the 20 companies with the largest pension deficits paid out more in dividends than their deficit (see chart below for full details).
The firm says the analysis raises questions over whether public companies have got the right balance between shareholder payouts and funding for their staff pension schemes during a week when Philip Green faces an interrogation by the Work and Pensions select committee about the BHS scheme deficit.
The total pension scheme deficits of current FTSE 100 firms in 2014 was £52 billion, yet in both 2014 and 2015 they paid out £48 billion in dividends and in some cases share buybacks came on top of those distributions.
With a further £49 billion in payments from these firms expected by the analysts’ consensus for 2016, 10-year Gilt yields at new record lows and the Bank of England hardly rushing to raise interest rates, the picture seems unlikely to improve.
|Total deficit 2014||Dividends paid by those in deficit|
Russ Mould, investment director at AJ Bell, says: “The collapse in interest rates and bond yields to record lows for a sustained period of time has contributed to substantial pension deficits for many firms and this has been bought into stark focus by the plights of BHS and Tata steel in recent weeks.
“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 under investment 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 in to 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 work force.”
Thirty-five FTSE 100 firms paid out more in dividends in 2014 than their pension deficit (the first eight firms listed are in the top 20 highest deficits):
|Pension deficit (£m)||Dividend (£m)|
|Royal Dutch Shell||-6,739||7,531||7,999||10,253|
|British American Tobacco||-628||2,761||2,871||3,049|
|Legal and General||-494||669||797||842|
|Smith & Nephew||-115||177||186||198|
|Associated British Foods||-31||269||277||289|
|London Stock Exchange||-23||107||125||142|
*The analysis compares data published by Lane Clark & Peacock LLP on FTSE 100 deficits taken from 2014 full-year accounts with dividend data sourced by AJ Bell from Digital Look. The analysis covers firms that were members of the FTSE 100 in 2014 and remain members today.