The Big Picture
FTSE firms should cut dividends to accelerate DB endgame 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Within 5 years Within 10 years Within 15 years
15+ years/buyout unachievable
Current contributions 2x contributions
5x contributions Source: Barnett Waddingham
If FTSE 100 companies paid an extra 6% into their defined benefit (DB) pension scheme then almost 70% of could buyout within 10 years, con- sultancy Barnett Waddingham claims. Unless this happens then just over one in five of such companies stand to free themselves from their pension scheme responsibilities in the next five years, largely due to rising asset prices in the past few years and contributions from sponsors. FTSE 100 members are certainly in a position to accelerate the journey to their endgame, yet to achieve this, decisions would have to be made that may not be warmly received by the markets. Indeed, blue chips with a final salary scheme earned a combined £134bn of post-tax profits in 2018, a huge improvement on the £57bn recorded in 2009. But as the profits have increased, so have the payments to shareholders through divi- dends and buybacks. They returned £120bn to shareholders in 2018, a 171% increase on the amount investors pocketed in 2009.
In contrast, deficit contributions paid to improve the funding level of DB schemes have declined by 10% over the same period to £8.3bn a year, or around £82bn in 10 years. This is only around an eighth of the £636bn paid to shareholders over the same time, or less than 10% of profits gener- ated over the period.
Diverting a greater share of profit towards the pension scheme would move schemes closer to their endgame, allowing companies to de-risk far more rapidly, but the board risk de-valuing their company if investors ditch their shares. Indeed, doubling companies’ annual pension contributions to £16.6bn would mean that almost a third of schemes would be able to de-risk all of their DB liabilities in five years, and 70% within the next decade. Such an additional contribution would account for just 6% of taxable profits in the FTSE 100. Funding this through a reduction in dividends would lower pay-outs to shareholders by just 7% each year, to £111bn.
12 | portfolio institutional | June–July 2019 | issue 85
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