The collapse of Carillion this year, partly due to the firm's pension scheme deficit brought the danger some firms face in to focus.
The unchecked growth of that deficit dealt a severe blow to the company, leading to calls for greater oversight of the way companies run their pension schemes. Companies that are servicing debts rather than investing or funding dividends could be showing the early stages of a Carillion style collapse.
So which dividend paying companies in the FTSE 350 index have the largest pension deficits?
Pensioners face pension provision shortfall
The death of Carillion affected more than just the company's shareholders and workers, it had a massive impact throughout the industry, putting severe strain on it's suppliers. The company's pensioners are further victims. While pensioners are protected to some degree by the Pension Protection Fund, their benefits will be less than those that they were expecting.
41 FTSE 100 companies could have eliminated their pension shortfall for less than the amount they spent on a single year's dividend to investors according to a 2017 report by JLT Employee Benefits. Carillion's disproportionately large pension benefit was noticed significantly in advance of it's final collapse.
There are several other companies that have significant pension deficits and pay dividends. The AA has cut it's dividend from 9p to 2p in response to profits that missed expectations. Dixons Carphone has issued a profit warning but continues to pay dividends.
Low interest rates have hit pension schemes hard
According to Tom McPhail of Hargreaves Lansdown:
"There are multiple causes of current pension deficits, including strengthened statutory requirements (relating to revaluation, dependants’ benefits and preservation rights, for example), increased longevity and tighter accounting standards, with increased mark-to-market valuations of assets. Most recently, and probably most seriously, the current low interest rate environment has driven up liability calculations"
With interest rates set to rise, does this lessen the danger for these companies? Mark Slater of the Slater Income, Growth and Recovery funds doesn't think so:
"We are wary of firms with large pension deficits. Rising interest rates do not automatically make such companies attractive."
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The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
Past performance is not a reliable indicator of future performance.
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