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Dividends higher than pension deficits at FTSE firms

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By Simon Read: Personal finance reporter: 15 June 2016

Some 35 of the biggest UK firms with pension deficits pay more in dividends than their shortfalls, analysis shows.

Pension firm AJ Bell calculated that 54 FTSE 100 companies had paid out £48bn to shareholders a year in the past two years.

That’s almost equal to the total £52bn recorded deficit of their combined pension schemes in 2014.

“The plights of BHS and Tata Steel have brought this into focus,” said Russ Mould, investment director of AJ Bell.

“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,” he said.

‘Play fair’

Last month, data from the Pensions Regulator showed that, during the past five years, shareholder payouts made by companies with defined-benefit pensions had often greatly exceeded the amount they spent in fixing their deficits.

It told companies that they need to play fair when balancing the need for profitability against protecting their staff’s futures.

Andrew Warwick-Thompson, executive director of regulatory policy at the Pensions Regulator, said: “It is important that employers treat their pension scheme fairly and we expect trustees to question employers’ dividend policies where debt recovery contributions are constrained.”

That theme was echoed by Mr Mould, who 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.”

He pointed out that insufficient contributions to a pension fund could leave the company with liabilities that could drag on future performance and ultimately lead to staff receiving lower pensions if the business ran into difficulties and entered administration.

Dividend distributions

But Tom McPhail, head of retirement policy at Hargreaves Lansdown, warned of the dangers of interfering with dividend distributions.

“With most pension funds investing in major UK companies, there’s a risk of actually undermining the assets which make up the pension schemes,” he said.

“There needs to be a balance between the needs of shareholders and workers’ pension schemes, although the experiences at BHS and Tata Steel have made it clear it’s time to re-examine how that balance can best be achieved.”

Shareholder payouts

The analysis showed that eight of the 20 FTSE 100 companies with the largest pension deficits paid out more in dividends than their deficit.

According to its 2014 full-year accounts, for instance, Royal Dutch Shell had a deficit in its staff pension scheme of £6,739m. In 2014 it paid out £7,531m to shareholders, while in 2015 the figure climbed to £7,999m.

But a spokesman for Royal Dutch Shell pointed out that its main pension schemes in the UK and the Netherlands were fully funded and that the overall global deficit was relatively small in relation to the company’s size.

Other FTSE 100-listed firms that had pension deficits of more than £1bn in 2014, but which paid out a higher amount in dividends, were AstraZeneca, GlaxoSmithKline, Rio Tinto and National Grid.

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