Ethics In Doubt As FTSE100 Dividends Exceed Pension Deficits

The ethics of investing are inextricably tied up with the way Britain’s biggest firms are managing their pension deficits.

More than 50 FTSE 100 firms nursing huge pension deficits paid out close to £100 billion in dividends to shareholders during the past two years.

At the same time, they reported a £56 billion black hole in funding for their pension schemes, according to data released by investment platform AJ Bell.

The data also disclosed that 35 FTSE 100 companies paid more in dividends than the deficits in their pensions.

The issue, says AJ Bell, is if public quoted companies have struck the right balance between rewarding shareholders and maintaining pledges to fund staff pensions.

Creaming off cash

The companies are expected to pay out around another £50 billion in dividends this year, while the deficits persist.

CEOs complain that pension deficits are swallowing cash the companies need to reinvest to grow their businesses.

The analysis shows shareholders are creaming off cash that is badly needed to refloat company pensions.

Worse, many of the shareholders are institutional investors, such as other pension schemes, taking profits to protect their own interests but damaging the pensions of others at the same time.

The fear is government buckling under big business pressure to change pension rules in the Tata Steel case will leave a loophole for FTSE companies to cut loose their pensions and the billions of pounds of investment they need.

Drag on performance

Instead, the lifeboat of the government backed Pension Protection Fund will be left to pick up the pieces while paying pensions worth 90% of the contributions made by members.

Russ Mould, investment director at AJ Bell, said: “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 pay outs. 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.”

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