Almost 10% of FTSE 250 firms would require more than two years’ dividend payments by their parent companies to settle defined benefit fund deficits, warns JLT Employee Benefits.
Analysis by the consultant of the U.K.’s 250 largest companies showed 23 firms, equating to 9% of the index’s constituents, would need this level of payment. The total deficit of these funds was £4.7 billion ($6.3 billion) as of June 30.
A further 12 companies would need a payment of up to two years’ dividends to settle the deficit in full, and 56 companies would need up to one year’s dividend to settle the deficit.
Parent companies continue to contribute to their DB funds, although at a lower level than a year ago. In the most recent fiscal year, FTSE 250 companies contributed £1.21 billion toward funding deficits, down from £1.53 billion a year previous.
The estimated total deficit of all FTSE 250 funds at June 30 was £11 billion, relatively unchanged from 12 months ago.
The consultant also considered different measures of liabilities. Using a AA bond discount rate, FTSE 250 liabilities totaled £81 billion. Using a risk-free or gilt-based discount rate would increase liabilities to around £100 billion, with total deficits as of June 30 increasing to around £30 billion on this basis.
“While these metrics don’t capture the entire picture, they are a useful indicator of the pension drag on the sponsoring company,” said Charles Cowling, director at JLT Employee Benefits, in a statement accompanying the analysis. “High levels of debts can severely constrain a company’s ability to invest in vital research and development, upgrade its operations and hire skilled staff, affecting its competitiveness and long-term prospects. As Brexit has increased the uncertainty around trade regulations and tariffs, being highly competitive is a key success factor.”
Mr. Cowling added that company shareholders are increasingly aware of the potential disruption a pension fund can cause to a business, and warned it should be expected to weigh down a company’s share price.
“While 9% may not seem a lot, the situation in the FTSE 250 is much more serious than in the FTSE 100, which has only a couple of companies with such a pension burden,” he said. Companies should take every opportunity to stop deficits and liabilities growing, and put in place a plan to reduce the size of the pension fund, he said.