Britain's biggest firms in the spotlight as dividends dwarf pension contributions

Oliver Gill
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The pension schemes of FTSE 100 firms were in an aggregate surplus 10 years ago (Source: Getty)

Britain's blue-chip firms paid out four times as much in dividends as they did in pension contributions, a report released today has revealed.

Some £150bn has been paid into pension schemes by FTSE 100 firms over the last 10 years.

But the report by LCP found this has failed to plug the gap: an aggregate surplus of £12bn in 2007 stands at a deficit of £17bn at the end of June 2017.

Meanwhile, total FTSE 100 pension liabilities have rocketed from £336bn in 2007 to £625bn, 10 years later.

The ratio of dividends to pension contributions has been the subject of increased scrutiny in recent months. In July the chair of the work and pensions select committee Frank Field said more need to be done to put pensioners ahead of shareholder payouts.

"Looking just at companies with 31 December year-ends, 39 declared pensions deficits totalling £37bn," LCP partner Bob Scott wrote in the report.

"Those same companies paid out £39 billion in dividends during 2016."

Read more: Britain's pension shortfalls are narrowing by more than £1bn a day

Getting tough

The Pensions Regulator has promised to get tough on companies paying out dividends while neglecting the needs of their pension schemes. The work and pensions ministry has recently proposed plans to give the UK's pensions watchdog greater powers to "intervene" where it has concerns.

LCP said firms were struggling to plug pension gaps because of an ageing population and falling bond yields – which drives up the valuation of liabilities.

However, leading pensions bodies disagreed that companies should divert more cash into pension pots.

Pensions and Lifetime Savings Association (PLSA) director of external affairs Graham Vidler said: "The need to pay for past promises could divert employer resources away from the investment necessary to ensure their firms’ future.

“The current system is not fixing itself as it is too fragmented, manages risk inefficiently and has a rigid approach to benefits."

The PLSA called for a consolidation of the defined benefit schemes to reduce risk to members of pension schemes.

Read more: This London borough just became the first to be fined by pensions watchdog

Five firms facing a pension pickle

1) British Airways owner IAG – Pension liabilities (currently standing at £25bn) as a proportion of the airline's share price have rocketed. At the end of 2015 liabilities were 153 per cent of market capitalisation, this rose to 268 per cent at the end of 2016 – far and away the largest proportionally on the FTSE 100.
2) Royal Mail The firm has the best funded blue chip pension scheme. Assets totalled £7.4bn compared with liabilities of £3.8bn; equating to cover of 193 per cent. This is against the backdrop of the mail giant's plans to shut its pension scheme in March 2018.
3) Royal Dutch Shell – The oil behemoth has both the largest deficit (£6.9bn) and the largest liabilities (£73bn) of the FTSE.
4) Royal Bank of Scotland – Despite forking out £4.2bn in pension contributions to steady the ship at the start of 2016, RBS has liabilities representing 167 per cent of its market capitalisation.
5) BT The telecoms giant is currently undergoing a three-yearly review of its pension scheme. It will be negotiating future contributions with trustees, which may not be helped by the fact it has the second largest pension liability (£50bn) and the third largest deficit (£6.4bn) on the FTSE 100.

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