DATA CRUNCH


Deficit red flags could shake investor confidence


By Victoria Tichá


Investors are keeping a eye on more than just dividend payouts – a sizeable pension deficit can have a detrimental impact on a company’s share price


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ompanies with large defined benefit pension deficits risk seeing their share price drop as investors stay away, after


equity analysts raised questions over whether their pension plans need urgent topping up. A screening of the FTSE All


Share Index by Liberum reveals the companies with deficits that are worryingly large relative to their market capitalisation. The findings show 18 stocks


with pension deficits exceeding 10 per cent of the market value of their outstanding shares. Dixons Carphone tops the list, with underfunded promises worth 46 per cent of its total equity. While these companies made


both dividend and pension contribution payments over the past five years, payments to dividends were larger than their pension contributions, and relatively large compared with their overall equity. The data suggest these companies could struggle to pay out their pension promises in the future if they do not top up contributions, according to the author of the report, Liberum’s equity strategy analyst Andrew Coury.


Share price threat builds Investors have become increasingly aware of funding statuses in the wake of high-profile defaults, including big-name collapses such as Carillion, BHS and House of Fraser, explains Mr Coury in the report. This suggests shareholders are growing wary of stocks


40


ITS MARKET CAP BEFORE IT ISSUED A WARNING


CARILLION HAD A DEFICIT AROUND 4.5 TIMES


with comparatively large pension deficits. Commenting on the figures,


Liam Mayne, partner at Barnett Waddingham, says these pension schemes are likely absorbing a significant amount of cash from their sponsoring business, even relative to what shareholders are earning. He says: “The significance of


this is that if the pension deficit of such a company worsened then it is likely to have a significant impact on what shareholders can expect to earn. “It also means that if the


business underperforms then it may have to cut shareholder payments substantially in order to maintain pension deficit contributions.” While the data screened for


stocks with a pension deficit at least 10 per cent of market cap, a handful had pension deficits worth almost half the size of the value of the company. “To put it into context, Carillion


had a deficit that was around 4.5 times itsmarket cap before it issued a warning,” says Mr Coury. “The list shows current deficits


are relatively smaller – however, there is a concentration of companies that have comparatively high deficits.” He adds: “Given the size of the


deficit relative to its market cap, the question is are the companies looking out for themselves or the scheme members?” According to Charles Cowling,


chief actuary at Mercer, some investors will steer clear of companies with big pension issues. He says: “Shareholders are wary


of the size of the investment risk, the size of the pension scheme, and they are wary of the size of the deficit; all of these things affect company share prices.” He continues: “At a very base


level, it is a real problem and that is why there is an imperative on companies to try and sort


You can be pretty sure that those companies will be under close scrutiny by the


Pensions Regulator Charles Cowling, Mercer


out the funding of their pension schemes, because shareholders are quite reasonably nervous about such large financially challenging positions.” He adds: “What you will find is


that for those companies at the top [of that table] pensions will be on the board agenda, and they will be managing the pension scheme as closely as other key parts of their business.”


Measurements of risk are approximate The figures used in the analysis are based on company filings – accounting measures – rather than the actuarial valuations used in triennial reviews. “The accounting and actuarial


measures for a pension’s funded status can vary materially,” explains Mr Coury. “It would also be important


to look at what the scheme’s assets have done, if they have underperformed etc, but we do not have visibility on that,” he adds. According to Barnett


Waddingham’s Mr Mayne, the ratio of funded status versus market cap is “a relatively simplistic measure” of the balance between shareholders, business and pension members. He suggests this is because


businesses with a high pension deficit will likely be very active in managing the pension problem, given the potential impact on shareholder payments if it does not. He continues: “Like any metric, it has pros and cons… it does not


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