More than half of FTSE 100 companies could clear their defined benefit (DB) pension scheme deficit in less than two years if they cancelled their dividend, JLT Employee Benefits believes.
Research by the firm has found that 53 members of London’s blue chip index could see their pension scheme achieve 100% funding if they made a radical policy change. This appears a huge task with only six companies currently putting more cash into their DB pension schemes than they hand back to shareholders.
The total disclosed pension liabilities of FTSE 100 companies fell to £586bn from £614bn in the past year, JLT estimates. Royal Dutch Shell has the largest disclosed pension shortfall at £57bn, making it one of 16 companies with a deficit north of £10bn.
Improving pension scheme funding is something that big cap companies have been working on. Executives in the index’s boardrooms approved payments totalling £6.3bn into their pension funds in the year to 30 June 2016. This was up from £6.1bn in the previous 12 months. BT led the way with an £800m contribution.
JLT Employee Benefits director Charles Cowling said the pension scheme represents a material risk to a “significant” number of FTSE 100 companies, pointing to eight blue chip businesses with DB liabilities higher than their market value.
“This is likely having a negative impact on equity prices and raises the radical question of whether it could make sense to erase pension deficits altogether by using funds that would normally go out as dividends or by borrowing from the capital markets,” he said.
Cowling added that while a pension fund deficit should be seen as a debt it is not as an efficient form of borrowing as say bank debt, where the interest payments qualify for tax relief.
“So, for many companies, it is more efficient for them to borrow in the capital markets than from their pension scheme by running a pension deficit.
“The good news aspect of all this is that it is clear that for the very large majority of FTSE 100 companies, their pension deficits can be easily managed within the normal ongoing management of their capital structure – even for some of those with very large pension deficits,” Cowling said.
