Pension deficits may cause more dividend cuts
UK - More companies could start cutting dividend payouts in an attempt to help fund pension deficits, although Towers Perrin has warned this would only be part of the solution.
The consultancy firm pointed out that while no company has yet failed to pay a dividend, with most firms trying to honour their payments, many FTSE 100 companies are beginning to scale back dividend levels.
In May BT confirmed it had agreed a funding strategy with the trustees of the £29.3bn (€33.9bn) pension scheme for its £3bn deficit - on an IAS19 basis - that allowed for a "sustainable dividend policy". (See earlier IPE article: BT told to delay actuarial valuation results)
Peter Routledge, head of pensions and employee benefits at Towers Perrin, added: "We expect we will see much more of this as the liquidity crisis continues as most businesses will be cash constrained."
Although the average level of dividend reduction is unclear as companies are "feeling their way and testing investor expectations", Towers Perrin suggested dividend cuts of at least half could be anticipated, "but maybe even more" depending on the circumstances.
Research by the firm suggested that while dividend payouts for the FTSE 100 companies have remained fairly stable at around £50bn a year, over the last 18 months the combined pension deficit of the top 100 UK companies more than doubled from £25bn to £60bn.
However Routledge warned that while reducing dividends is a "valid solution" to helping reduce pension deficits it needs to be part of a wider strategy by the company and pension fund as there is "no silver bullet".
Instead he suggested a combination of measures including enhanced transfer values to encourage members to leave the scheme and reduce liabilities, alongside buy-ins and buy-outs once the option becomes more affordable.
Routledge also revealed non-cash contributions are "becoming increasingly popular", with particular growth over the last year, such as the use of escrow accounts and contingent assets promised to the pension scheme in lieu of cash.
However another option currently finding favour among pension schemes is the use of strategies with built-in "trigger points", which allow schemes to move quickly when markets improve, to lock in the gains.
Routledge said: "The advantage of the trigger point is it allows them to act quickly and it is one of the things they've struggled with in the past as pension funds have not been nimble enough to take advantage of market improvements."
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