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Blog : BOARD TALK

9% Of FTSE 250 'Faltering Under Pension Debt' - Report

Posted on April 3, 2017 at 12:00 PM

A report just out says that 23 FTSE 250 companies  - equating to 9% of the index's constituents - are "faltering under a worrying amount of pension debt."


Research from JLT Employee Benefits , one of the UK's leading pension and employee benefit consultancies has  found that 23 FTSE 250 companies would need a payment of more than two years’ dividends in order to settle their defined benefit (DB) pension deficits in full, which is worth £4.7bn collectively.


It adds that 12  FTSE 250 companies would need a payment of up to two years’ dividends to settle their pension deficits in ful. But 56 companies could have settled their pension deficits in full with a payment of up to one year’s dividend.


As I wrote on Forbes last November: It's About My Pension, Stupid: Pensions Are A Corporate Governance Issue. So why does it only get intermittent coverage ? Pensions are an excellent example of the overlap between a human concern and financial risk (think ESG - also covered here on Forbes).


Another measure of financial risk posed by DB pension liabilities is its size relative to the company’s equity market value, says the report. Twenty FTSE 250 companies have total disclosed pension liabilities greater than their equity market value. For The Go-Ahead Group, total disclosed pension liabilities are more than four times their equity market value, says the report (my emphasis).


Charles Cowling, Director, JLT Employee Benefits


 “While these metrics don’t capture the entire picture, they are a useful indicator of the pension drag on the sponsoring company. 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" says Charles Cowling, Director, JLT Employee Benefits.


“Shareholders are increasingly aware of the potential disruption that a massive pension scheme can cause to a business and it should be expected that it will weigh the share price down" he adds.


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 says Mr Cowling.


As at 30 June 2016 the total deficit in FTSE 250 pension schemes is estimated to be £11 billion. Only 41 companies disclosed a pension surplus in their most recent annual report and accounts; 91 companies disclosed pension deficits.


In the last 12 months, the total disclosed pension liabilities of the FTSE 250 companies have remained approximately at £81 billion, says the report (my emphasis).


A total of 26 companies have disclosed pension liabilities of more than £1 billion, the largest of which is FirstGroup with disclosed pension liabilities of £4.05 billion. (my emphasis)


A total of 156 companies have disclosed pension liabilities of less than £100 million, of which 118 companies have no defined benefit pension liabilities.


Pensions are a ticking corporate governance time bomb, helpfully in the spotlight now thanks to Sir Philip Green. For the latest on that, see this story by The Guardian.

 

Categories: Scrutiny, Governance, Pensions