• BA and BT have won extra time to repair pension fund deficits
Almost one-in-three blue chip pension schemes are so under-funded
that they cannot be restored to health without companies either slashing
dividends and capital spending or securing radical concessions from
trustees and regulators, according to a study by KPMG.
The findings provide a stark illustration of the increasing strained symbiosis between investors and firms with final salary pension schemes, as their profits dry up and, in some cases, solvency concerns hove into view.
Shrinking cashflows and ballooning pension scheme shortfalls across FTSE 100 companies at the end of 2009 meant that, after dividend payouts and capital expenditure, 32% of firms "can now not payoff deficits in any realistic time frame from discretionary cash flow," KPMG concluded. This compares with 22% of FTSE 100 firms a year ago.
The published study does not name those firms with the least affordable pension deficits as many FTSE 100 firms are audit clients of KPMG. However, blue chip companies with large deficits such as BT and British Airways are thought to be high on KPMG's list, as are utility groups with high capital expenditure commitments such as National Grid.
Banks such as HSBC, Lloyds Banking Group and RBS – which have large schemes and last year saw depressed profits – also feature, though profits have recovered a good deal in recent months. By contrast the impact of plunging profits at BP, which also has a large scheme, is not thought to be captured by the research.
Mike Smedley, KPMG pensions partner, claimed the findings highlighted a need for pragmatism from pension trustees. "The most important thing in securing the future of pension provision is to secure the future of the business, not the other way round," he said. "If a business says to its shareholders we're not going to pay any dividends until we've met our pensions deficit, their share price probably collapses, the banks won't lend to them, they can't invest in the business and then they might struggle to make the profit to fund the pension scheme – potentially."
His perspective is not shared by all pensions experts. John Ralfe, an independent consultant, said: "I don't think the conclusion should just be that trustees should go softer on companies. In fact I think companies and shareholders need to recognise that dividends are also under pressure."
Ralfe added that however bad the funding crisis was among Britain's top blue chip employers, it was almost certainly worse lower down the market among smaller firms.
So far pension regulators have shown themselves extremely accommodating to large businesses seeking extra time, beyond the usual 10-year limit, in which to repair their pension deficits. Both BA and BT have secured such deals, with the latter still able to maintain an attractive dividend for investors.
An intervention by the Pensions Regulator in the case of loss-making music group EMI this autumn will be closely watched by many firms looking to discover at what point the watchdog is prepared to show its teeth. Regulators must determine the amount of cash the troubled group must pay into its pension scheme each year to repair a deficit previously estimated at up to £217m. EMI has £3bn in borrowings after being acquired in a heavily debt-financed deal by private equity house Terra Firma three years ago. Since then rows with pension trustees have meant no repairs to the deficit have been made.
The ruling on EMI is expected to provide an important moral hazard benchmark from which other strained pension negotiations will take their lead.
The findings provide a stark illustration of the increasing strained symbiosis between investors and firms with final salary pension schemes, as their profits dry up and, in some cases, solvency concerns hove into view.
Shrinking cashflows and ballooning pension scheme shortfalls across FTSE 100 companies at the end of 2009 meant that, after dividend payouts and capital expenditure, 32% of firms "can now not payoff deficits in any realistic time frame from discretionary cash flow," KPMG concluded. This compares with 22% of FTSE 100 firms a year ago.
The published study does not name those firms with the least affordable pension deficits as many FTSE 100 firms are audit clients of KPMG. However, blue chip companies with large deficits such as BT and British Airways are thought to be high on KPMG's list, as are utility groups with high capital expenditure commitments such as National Grid.
Banks such as HSBC, Lloyds Banking Group and RBS – which have large schemes and last year saw depressed profits – also feature, though profits have recovered a good deal in recent months. By contrast the impact of plunging profits at BP, which also has a large scheme, is not thought to be captured by the research.
Mike Smedley, KPMG pensions partner, claimed the findings highlighted a need for pragmatism from pension trustees. "The most important thing in securing the future of pension provision is to secure the future of the business, not the other way round," he said. "If a business says to its shareholders we're not going to pay any dividends until we've met our pensions deficit, their share price probably collapses, the banks won't lend to them, they can't invest in the business and then they might struggle to make the profit to fund the pension scheme – potentially."
His perspective is not shared by all pensions experts. John Ralfe, an independent consultant, said: "I don't think the conclusion should just be that trustees should go softer on companies. In fact I think companies and shareholders need to recognise that dividends are also under pressure."
Ralfe added that however bad the funding crisis was among Britain's top blue chip employers, it was almost certainly worse lower down the market among smaller firms.
So far pension regulators have shown themselves extremely accommodating to large businesses seeking extra time, beyond the usual 10-year limit, in which to repair their pension deficits. Both BA and BT have secured such deals, with the latter still able to maintain an attractive dividend for investors.
An intervention by the Pensions Regulator in the case of loss-making music group EMI this autumn will be closely watched by many firms looking to discover at what point the watchdog is prepared to show its teeth. Regulators must determine the amount of cash the troubled group must pay into its pension scheme each year to repair a deficit previously estimated at up to £217m. EMI has £3bn in borrowings after being acquired in a heavily debt-financed deal by private equity house Terra Firma three years ago. Since then rows with pension trustees have meant no repairs to the deficit have been made.
The ruling on EMI is expected to provide an important moral hazard benchmark from which other strained pension negotiations will take their lead.
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