Questions have been raised again about whether UK companies are putting shareholder rewards ahead of their duty to protect employees, as new research shows that FTSE100 firms with pension deficits paid out £48 billion in dividends over the past two years.
These dividend payments are almost equal to the size of the pension deficit at these 54 companies. In total these firms have unfunded liabilities in their staff pension schemes of £52 billion.
This research was conducted by the investment platform AJ Bell. Looking at the 20 FTSE companies with the biggest pension shortfalls, AJ Bell found that eight of these firms paid shareholder dividends that exceeded the size of their funding deficits. In almost all cases these dividend payments have increased in recent years.
These companies include Royal Dutch Shell (RDSB), AstraZeneca (AZN) , GlaxoSmithKline (GSK), National Grid (NG), British American Tobacco (BATS) and Vodafone (VOD). In total 35 FTSE companies paid out dividends that exceeded the size of their pension shortfall.
Which FTSE Giants Have the Biggest Pension Deficits?
For example, Royal Dutch Shell had a pension deficit of £6.7 billion in 2014, according to data published by Lane Clark & Peacock LLP. Last year its dividends totalled £7.9 billion and are estimated to be £10.2 billion for 2016 – according to AJ Bell and Digital Look.
Meanwhile, AstraZeneca has a £1.8 billion black hole in its pension funding, but paid out £2.3 billion in dividends in 2015 and is estimated to pay out £2.4 billion this year. GlaxoSmithKline has a £1.6 billion pension deficit and paid out £3.8 billion in dividends in 2015 and is on track to pay a slightly higher sum this year. British American Tobacco has a £628 million pension deficit but paid out £2.8 billion in dividends last year and is estimated to pay out just over £3 billion in dividends in 2016.
This research comes on a day when Sir Philip Green, the former owner of BHS faced a grilling from MPs about the collapse of the privately-owned retailer, and the deficit in its staff pension fund.
Balancing Shareholder and Employee Benefits
If renewed focus is put on these pension deficits it could increase pressure on firms to reduce these dividend payouts.
Russ Mould, the 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 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 into difficulties and enters administration.
“With prospects of high bond yields and interest rates looking slim, there is a huge questions for companies to answer around whether they are adequately funding their pension schemes in order to sustain the future pensions of their work force.”
Brexit Threat to Dividends
Commenting on this research, Danny Cox of Hargreaves Lansdown (HL.) said that dividend payments had already come under pressure in some sectors in recent years. “We’ve seen dividend cuts in some commodity and natural resource companies. Should we see a Brexit and resulting economic slowdown, dividends will come under pressure as companies look to batten down the hatches.”
He pointed out that after the last financial crisis, many banks and financial services companies stopped paying dividends to shareholders, or cut back these payments substantially.
He added: “Companies with legacy defined benefit schemes have to balance the need to honour their obligations to current and past members, provide attractive workplace pensions for newer employees and satisfy shareholders with their dividend policy. The risk is that the new wave of defined contribution scheme is where cost savings are made.”
