More UK companies are expected to adjust capital or cut dividends to fill growing holes in final salary pension schemes this year.
The discovery of huge pension deficits at Tata Steel Ltd and collapsed retailer BHS Ltd last year caused scandals and drew attention to the widening gap between the assets held by such schemes and the money they owe to pensioners.
British government bonds, or gilts, have been the main assets of defined benefit or final salary pension schemes. However, years of low UK interest rates and a flight to safe-haven investments after Britain’s vote last year to exit the EU have depressed yields, leaving shortfalls.
Several companies have taken steps in recent months to finance the deficits. Specialist plastics maker Carclo PLC cut dividends, printing firm Communisis PLC reduced its capital base and fund manager Rathbone PLC raised capital.
With FTSE 100 company pensions schemes now only 88 percent funded as of Friday last week — according to consultant Aon’s pension risk tracker — compared with 98 percent at the end of 2015, more companies are expected to follow suit.
The recent actions by the three small and mid-cap firms were “the tip of the iceberg,” said Richard Farr, managing director at consultants Lincoln Pensions.
“Each year that goes by, the pensions mountain has not got smaller and companies are running out of time,” he said.
A pensions risk survey by Mercer shows an almost threefold increase in deficits in FTSE 350 companies last year.
BT Group, which has one of Britain’s largest private-sector final salary pension schemes, slashed its forecast for free cash flow last week, which consultants said could have a negative effect on the pension deficit.
“BT remains a strong company that is able to make contributions into its pension scheme, pay shareholder dividends and invest in the future of the company,” a company spokesman said
Deficits on the balance sheet can also make companies less attractive to potential buyers.
A 2014 study by Llewellyn Consulting showed that a £100 (US$125) increase in the reported pension deficit of a FTSE 100 company would reduce the company’s value by £160.
Tata Steel is trying to hive off its £15 billion UK pension scheme to clear the way for a merger between its European business and Germany’s Thyssenkrupp AG.
Billionaire former BHS owner Philip Green is wrangling with regulators over funding for the £571 million pension scheme deficit of the company, which collapsed with the loss of 11,000 jobs. He sold the loss-making department store chain last year to Dominic Chappell for £1.
The case has put pressure on the pension regulator to be firm with companies with large pension deficits. A government green paper consultation on the topic is expected to be published in the next few weeks.
A committee in the lower house of parliament has called for fines for large companies that have not honored contributions to their pension schemes, to act as a “nuclear deterrent.”
STATE PASTS
Privatized companies running generous pension schemes left over from their days as state industries — such as BT — are particularly under scrutiny this year because of worries about their deficits, pensions consultants said.
Balfour Beatty PLC and Tesco PLC are among other companies with pension schemes under close watch, said Martin Hunter, principal at consultants Punter Southall.
A spokesman for Balfour Beatty pointed to a statement from last year that said the company had agreed with trustees a plan for the pension fund to reach self-sufficiency during 2027, three years ahead of the previous plan.
A spokesman for Tesco reiterated the guidance the company issued in October last year, when it said it would not increase the size of its annual £270 million pension top-up payments agreed with trustees in 2015, despite its deficit jumping to £5.9 billion, from £2.6 billion in February last year.
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