Pension deficits cost investors

Marc Sidwell
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MARKS and Spencer has done an impressive job of cleaning up its pension deficit, knocking off £1bn over the last three years. It has now agreed a ten-year plan to deal with the remaining £290m.

That saw a bump in the share price, which some attribute to the greater attractiveness of Marks and Spencer as a takeover target. Having its pensions liabilities under control avoids a poison pill for any future buyer.

But perhaps stockholders were simply acknowledging that pension deficits are bad for their interests already. Research by Professor Ian Tonks and Weixi Liu this year found that companies with large pension deficits make up the funding shortfall by paying lower dividends to shareholders. The researchers looked at a sample of 180 firms from the FTSE 350 over the period 2000-2007, and found a strong negative relationship between a firm’s dividend payments and its mandatory pension contributions.

The impact of pension deficits on corporate performance is also becoming a serious matter. Research this November from the Institute of Chartered Accountants of England and Wales (ICAEW) and pension fund consultancy Mercer found more than half of those surveyed said that high defined benefit pension deficits will have a negative impact on the financial performance of their business over the next three years.

With Hymans Robertson putting the FTSE 350’s collective pension deficit at £115bn in the year to 31 July 2012, pension deficits will continue to affect corporate performance and dividend payments. Marks and Spencer is getting its debts in order, but it wasn’t alone in having a problem.

Hopefully rumours of the demise of the M&S meal deal thanks to a state minimum price for alcohol have been exaggerated. But a measure intended to change drinking habits was bound to affect firms that sell alcohol. By reducing competition and raising prices, it will boost them at consumers’ expense. Perhaps it is time to comfort yourself not with a glass of overpriced scotch but by doubling down on the suppliers who will be the beneficiaries.