Plugging shortfalls in corporate pension pots will have a negative effect on dividend pay-outs
According to advisory firm LCP, new accounting rules from The Pensions Regulator could adversely affect the balance sheets of FTSE 100 companies by up to £100bn; the report estimates that around a quarter of the UK’s leading corporates could be hit by as much as £1bn apiece.
The need for change has been driven by the increasing number of large organisations that have allowed a shortfall to build up in their corporate pension schemes. If such companies suddenly face hard times, or go bust – as in the highly-publicised cases of Carillion and BHS last year – pensioners stand to suffer a significant reduction in their retirement income unless they can be bailed out via the Pension Protection Fund.
The ongoing controversy revolves around whether paying out dividends to shareholders should take precedence over adequately funding a corporate pension scheme. The LCP report highlights the fact that companies in the FTSE 100 collectively paid out £90bn to shareholders last year – roughly seven times the £13bn they put into the workers’ pension pots. The underlying message conveyed by this statistic could hardly be clearer.
Why this is important is that dividend cuts made in order to finance the proposed changes to pensions will have a knock-on effect on private individuals or institutions (including pension funds) who rely on the reliability of that income. As it is, many leading companies (including the likes of M & S and Vodafone) are already cutting dividend pay-outs due to other commercial pressures, including the uncertainty created by Brexit.
The yield on the FTSE 100 is 4.5% and, as the Sunday Express pointed out recently, any hint of recession would only exacerbate the situation by putting a question mark over the sustainability of dividends. With deposit rates from the banks still pitifully low and company dividends unreliable, it seems a good time to point out that the rates available to investors in P2P business loans are there for the slightly more adventurous.