Pension scheme trustees get more powers as deficits cause concern |
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Published
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Wed, 10 Aug 2005 06:55
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LONDON: Some of Britain's largest companies prefer to reward their shareholders rather than their employees, according to the findings of a study by actuarial consulting firm Lane Clark & Peacock. The study, which covered the 100 biggest companies (FTSE 100) in the U.K , found that they paid 39 billion pounds as dividends to shareholders in 2004 even as they have substantial deficits in their pension funds -- as much as 37 billion pounds as of end-July this year. In 2004, these companies paid a total 10.5 billion pounds into the pension schemes.
The firm said this outlook will soon change as the government has given powers to pension scheme trustees to secure higher pension contributions from employers. There could be confrontation between
managements of large companies and the pension scheme trustees and companies with large pension outstanding may have to face restrictions with regard to paying dividends and even raising capital.
Lane Clark & Peacock cited seven companies -- BAE Systems, British Airways, BT, Corus, Exel, Rolls-Royce Group and Royal & SunAlliance -- which have pension schemes higher than their respective market values and have large investment holdings in shares. These companies are also "notably exposed" to vagaries of the stock market.
It said the Footsie will have to climb above 6700 by this time next year from the current 5,363.7 in order to overcome the FRS 17 deficit (the pension accounting rule which requires companies to value future liabilities at the current market prices) of the top 100 firms in the country. Otherwise, these firms will have to put in more money.
BT tops the list of pension scheme defaulters with 5.1 billion pounds, which is a third of its stock market value. Only three companies -- Associated British Foods, Johnson Mathey and Old Mutual -- in the FTSE 100 do not have a pension deficit. However, many of the defaulting firms are planning to put in cash into their respective pension schemes. BT and Royal Bank of Scotland each have paid more than 1 billion pound in 2004, while Royal & SunAlliance introduced a package of measures, including a switch to a scheme based on average earnings instead of final salary.
The report highlighted the reliance of the large companies on stock market recovery to come out of the crisis. For example, it said supermarket group Wm Morrison had a hammering on the bourses recently, but its pension fund managers are not rattled as they say the 92 per cent of the pension funds are invested in equities and the market is bound to rally.
Lane Clark & Peacock is sure the regulations on pension funds that is coming into force this autumn will ensure that the scheme trustees have more say in administering the schemes and even determining the levels of pension contributions.
The firm's partner Bob Scott said in a note to the report, "Those companies with significant FRS 17 deficits on their balance sheets may well find themselves restricted in terms of the dividends they are able to pay to shareholders and capital they can raise for refinancing."
The government had set up a new pension regulator this year with powers to ensure that the companies do not compromise on their obligations. Scott was not sure whether the regulator will ban
dividend payments in case of pension deficits. "Rather than block dividend payments or share buybacks, what the Pension Regulator wants to see is companies taking steps to plug their deficits."
The report calculated the collective cost of insuring all the pension benefits at 150 billion pounds at the July 2005 deficit level. Many companies are now replacing final salary schemes that guarantee an income after retirement based on the length of service with money purchase schemes, which only guarantee how much they will pay into a worker's pension and not how much the pension will be worth on retirement.
Meanwhile, a spokesperson for the pension regulator confirmed that the regulator might intervene if there is "some sort of special dividend" being considered which would be detrimental to the state of the pension fund. "It might be something the company would want to consider notifying us about, and we might in an extreme case make a contribution notice," he said.
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