News & analysis
Pressure grows on boards to prioritise pension contributions over dividend payments
London-listed firms can expect growing regulatory pressure to prioritise pen- sion scheme funding over incentives to shareholders, The Pensions Regulator (TPR) has warned. TPR revealed in its Compliance and Enforcement Bulletin that it has recently targeted a defined benefit (DB) scheme with poor funding levels, pressuring the sponsor to cut dividend payments for six years, reduce the recovery plan schedule from 13 to seven years, make a £10m upfront payment as well as annual deficit recovery payments totalling £3.7m. “We have clearly set out our expectations for all workplace pension schemes and we will continue to intervene where we have concerns that a DB scheme is not being treated fairly by an employer,” says Nicola Parish, executive direc- tor of frontline regulation at TPR.
Investors spend £22.5bn on inflation hedging in first quarter
Asset owners were focused on protecting their portfolios against inflation in the opening three months of the year, but were less concerned about interest rate risk, a poll has discovered.
Inflation hedging increased by 2% to around £22.5bn compared to the final three months of 2018 as Brexit uncertainty continued. Yet the amount invested in pro- tecting against changes in the cost of cash fell 16% to £26.8bn during the same period. Central banks adopt- ing a dovish tone, economic growth slowing and con- sumer confidence falling were factors.
These were the main findings of BMO’s latest liability- driven investing (LDI) survey. The investment bank trading desks that were questioned for the research predict that nominal and real yields will rise during the second quarter while RPI swap rates could decline. Rosa Fenwick, LDI portfolio manager at BMO, warned: “Whilst all predictions are contingent on the progres- sion on Brexit negotiations and the eventual outcome, a softer result could give the Bank of England the con- fidence to hike rates given the tight labour market.”
FTSE 350 scheme deficit climbs £5bn as corporate debt yields fall
The regulator’s increased focus on corporate governance follows the high-pro- file cases of schemes collapsing, including the Carillion Pension Scheme and the one for BHS’ staff. In each case, ailing companies continued to return cash to shareholders whilst systematically underfunding their retirement plans. At the time of its collapse, Carillion’s pension deficit was at £587m, yet the firm had paid £376m in dividends to shareholders in the five years preceding its default.
The problem appears to extend far beyond the case of a few rotten apples. Over the past year, only five FTSE 100 firms paid more into their final salary scheme than they handed back to their investors.
While a number of UK blue chip companies have recently cut their dividend, their overall shareholder payment still drastically exceeds pension scheme contributions.
Examples of those prioritising shareholders over retirement savers include Vodafone. The telecommunication giant recently announced a 40% dividend cut whilst having stepped up its scheme funding with a £243m contribution across two schemes in 2017. However, over the past year it paid more than €4bn (£3.5bn) in dividends to shareholders. Marks and Spencer has also slashed its shareholder incentives by 40%. And while the high street retail giant has committed just under £60m in additional contributions in the past two years, the amount is dwarfed by the more than £300m it has allocated for its investors over the same period.
6 | portfolio institutional | May–June 2019 | issue 84
The accounting deficit of the FTSE 350’s defined bene- fit (DB) pension schemes increased by £5bn in May, according to Mercer.
The combined shortfall in the retirement schemes sponsored by the largest 350 main market companies listed in London jumped to £57bn during the month. This reversed the decline recorded in April that saw the deficit shrink by £3bn. But in May liability values increased £11bn to around £856bn. This was the result of a slight 0.14% dip in cor- porate bond yields. A 0.08% decline in market implied inflation partially offset this, while asset values jumped £6bn to almost £800bn. Mercer actuary Charles Cowling said that these figures serve as a warning to those responsbile for ensuring that pensions are paid in full and on time. “Recent political developments in the UK and global economic uncertainty means that scheme trustees and sponsors must prioritise risk management,” he said. “With Brexit uncertainty reaching a new high following Theresa May’s resignation, we expect volatility to persist for the foreseeable future,” he added.
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