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New pension deficit rules putting dividends at risk

General discussions about equity high-yield income strategies
richfool
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New pension deficit rules putting dividends at risk

#441490

Postby richfool » September 11th, 2021, 4:39 pm

I spotted this in the Telegraph:

New rules are putting dividends at risk - FTSE 100 firms will have to pay more for their pension black holes from October
Changes to pension regulations in October could put an end to the dividend recovery by forcing companies to divert cash to cover burgeoning pension deficits rather than distribute it to shareholders.

The rules, set by The Pensions Regulator, state company directors will face a legal challenge if a dividend payment leads to a “material reduction” in a defined benefit pension scheme’s viability in the event of their company going bankrupt.

New powers have come about as a result of the Pension Schemes Act 2021, which was designed to strengthen the rules around the funding of company pension schemes in the wake of high-profile cases such as the collapse of BHS and Carillion.

LCP, a pensions consultancy, found 75 of Britain’s largest 100 companies were in pension funding deficits at the end of 2020 based on new, stricter calculations, up from 47 according to the old method.

Companies with deficits over £1bn that continued to pay large dividends in their last financial year included Shell, BP, BAE Systems, GlaxoSmithKline, AstraZeneca and Tesco
.

BP and Tesco paid dividends that were more than three times larger than their pension deficits. Vodafone paid a dividend worth 2.5 times its pension deficit while British American Tobacco paid shareholders around six times more than its pension deficit, according to SharePad, a data company.

https://www.telegraph.co.uk/investing/s ... ntial-cut/

AWOL
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Re: New pension deficit rules putting dividends at risk

#441698

Postby AWOL » September 12th, 2021, 6:34 pm

I think this policy is very sensible. Companies shouldn't be paying shareholders dividends at the expense of their underfunded employee pensions. Although things are considerably better than they were when my grandfather's employer spent the pension money on executive renumeration their has still been room for improvement.

monabri
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Re: New pension deficit rules putting dividends at risk

#441709

Postby monabri » September 12th, 2021, 7:07 pm

I do miss those JLT Benefits reports which gave the situation on FTSE100 and the FTSE250 companies. A riveting good read

:)

88V8
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Re: New pension deficit rules putting dividends at risk

#443361

Postby 88V8 » September 18th, 2021, 5:52 pm

richfool wrote:I spotted this in the Telegraph:
New rules are putting dividends at risk - FTSE 100 firms will have to pay more for their pension black holes from October

Been a long time coming. I'm amazed that the interferocrats have taken so long... and somewhat surprised that it's the Tories rather than Labour at last doing something.
But given the debt hole we're in, not surprising that the govt won't want to spend money plugging deficits in defunct schemes.

I have long eschewed the shares of cos with big holes. BA, BT of course... Didn't know about BATs and would hardly regard Shell and BP as being at risk, but thanks for the heads up.

Of course, being slightly cynical, some BoDs might welcome this as an excuse for a divi cut... one never knows.

V8

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Re: New pension deficit rules putting dividends at risk

#443527

Postby dealtn » September 19th, 2021, 11:22 am

88V8 wrote:
richfool wrote:I spotted this in the Telegraph:
New rules are putting dividends at risk - FTSE 100 firms will have to pay more for their pension black holes from October



I have long eschewed the shares of cos with big holes. BA, BT of course... Didn't know about BATs and would hardly regard Shell and BP as being at risk, but thanks for the heads up.



And that's what makes a market.

I have long loved them and the mispricing by people like you (but more realistically fund managers with much more money to invest) that eschew them without understanding the risks and pricing embedded into them. It's one of the few asymmetries you can find, and trade, in the market.

(To be clear I'm not dismissing your, or anyone's, right to not buy something they don't understand - I'm not playing the man - but for those comfortable with the pricing and risks, and possessing patience, asymmetries can be a route to meaningful outperformance).

ChrisNix
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Re: New pension deficit rules putting dividends at risk

#455941

Postby ChrisNix » November 5th, 2021, 5:18 pm

The problem is that the PR isn't sure what proper funding is.

There is some wording in the Pensions Act around the value of the Sponsor having to be greater than 50% of the buy out deficit (which means very comfortably able to fund any conceivable contributions required under normal funding plans), but they are too gormless to realize that a codified system would quickly ensure everyone complied.

Instead, the process resembles Moses having to climb Mt. Sinai to commune with God.

:roll:

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Re: New pension deficit rules putting dividends at risk

#455948

Postby scrumpyjack » November 5th, 2021, 5:42 pm

richfool wrote:I spotted this in the Telegraph:


Companies with deficits over £1bn that continued to pay large dividends in their last financial year included Shell, BP, BAE Systems, GlaxoSmithKline, AstraZeneca and Tesco
.

BP and Tesco paid dividends that were more than three times larger than their pension deficits. Vodafone paid a dividend worth 2.5 times its pension deficit while British American Tobacco paid shareholders around six times more than its pension deficit, according to SharePad, a data company.

https://www.telegraph.co.uk/investing/s ... ntial-cut/[/quote]

It is certainly sensible to stop companies overdistributing when their pension deficit is large, but this article is absurd. 1 billion is a trivial amount for Shell and to say they paid a dividend larger than the pension deficit may simply illustrate how small the deficit is in relation to the size of the company! Shoddy reporting.

taken2often
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Re: New pension deficit rules putting dividends at risk

#460936

Postby taken2often » November 25th, 2021, 6:33 pm

Great so pensions invest in shares for dividends to pay pension.. So get rid of all these employees that are dragging down the company and its future With DB Pension. Or perhaps reduce the wage increases that would reduce the defecit. What a great benefit for the Unit Trust industry. Switch off dividends improve growth, automatic boom in charges. I think we are seeing the benefits of lobbying. Just like KID that killed off global funds outwith the EU. That one cost me dearly.

Bob

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Re: New pension deficit rules putting dividends at risk

#460960

Postby gryffron » November 25th, 2021, 9:55 pm

BP and Tesco paid dividends that were more than three times larger than their pension deficits. Vodafone paid a dividend worth 2.5 times its pension deficit while British American Tobacco paid shareholders around six times more than its pension deficit, according to SharePad, a data company.

Surely that's good :?

If the company is generating that much profit then the Pension deficit is trivial. It would be much worse if the deficit was way larger than the profits/dividends. Who writes this rubbish? I thought the Telegraph was supposed to be a serious paper.

Gryff

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Re: New pension deficit rules putting dividends at risk

#461880

Postby taken2often » November 29th, 2021, 5:14 pm

What has been forgotten. Large non dividend companies were open to more executive abuse. Daft Projects such as entering the US markets where they had no chance. Large share options which paid more due to growth instead of dividends. Take the money and run when the projects did not work out take your choice I am sure there are many more examples.

Bob

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Re: New pension deficit rules putting dividends at risk

#467097

Postby Maroon » December 18th, 2021, 5:40 pm

Pensions shouldn't be in deficit. I can't see what excuse tesco can have for its pension to be in deficit. The fact that its profits are 3 times larger than its deficit means it has no excuse.
I can't see into the future but if it's profits we're hit substantially for what ever reason, the company could end up paying no dividend.
I would have thought that with life expectancy rising slower than previously predicted they should have cleared it by now.

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Re: New pension deficit rules putting dividends at risk

#467098

Postby Maroon » December 18th, 2021, 5:42 pm

PS you could change the header to dividends putting pensions at risk!!

scrumpyjack
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Re: New pension deficit rules putting dividends at risk

#467113

Postby scrumpyjack » December 18th, 2021, 6:53 pm

Maroon wrote:Pensions shouldn't be in deficit. I can't see what excuse tesco can have for its pension to be in deficit. The fact that its profits are 3 times larger than its deficit means it has no excuse.
I can't see into the future but if it's profits we're hit substantially for what ever reason, the company could end up paying no dividend.
I would have thought that with life expectancy rising slower than previously predicted they should have cleared it by now.


The Tesco pension deficit is only 5% of Tesco's market value and they paid an extra £2.5 billion into the scheme recently reducing the deficit by two thirds. The value of their freehold properties easily covers the notional deficit many times. Pension deficits can go up or down simply because of changes in actuarial assumptions about the future. The current rise in interest rates is likely to cut or abolish the deficit. It would be absurd to stop paying dividends just because the pension scheme has temporarily gone into a deficit that is tiny in relation to the size of the company. The regulator monitors this and agrees a plan with the company to reduce the deficit where one arises and most have arisen because of government actions (eg cutting interest rates or forcing companies not to have a surplus in their schemes! It is no wonder companies have increasingly wound up their schemes.

tjh290633
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Re: New pension deficit rules putting dividends at risk

#467145

Postby tjh290633 » December 18th, 2021, 9:33 pm

Don't forget that the "deficit" can be an illusion. The average time of payments from a defined benefit scheme would be 20 plus years away, so top-up payments only need to take account of payments which are immediately due.

Obviously the time is shorter if the fund was closed to new participants some years ago. Another factor is the ridiculously low level of interest rates. Were they to return to 2.5% or more, the deficits would vanish overnight.

TJH

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Re: New pension deficit rules putting dividends at risk

#467153

Postby Dod101 » December 18th, 2021, 9:56 pm

scrumpyjack wrote:
Maroon wrote:Pensions shouldn't be in deficit. I can't see what excuse tesco can have for its pension to be in deficit. The fact that its profits are 3 times larger than its deficit means it has no excuse.
I can't see into the future but if it's profits we're hit substantially for what ever reason, the company could end up paying no dividend.
I would have thought that with life expectancy rising slower than previously predicted they should have cleared it by now.


The Tesco pension deficit is only 5% of Tesco's market value and they paid an extra £2.5 billion into the scheme recently reducing the deficit by two thirds. The value of their freehold properties easily covers the notional deficit many times. Pension deficits can go up or down simply because of changes in actuarial assumptions about the future. The current rise in interest rates is likely to cut or abolish the deficit. It would be absurd to stop paying dividends just because the pension scheme has temporarily gone into a deficit that is tiny in relation to the size of the company. The regulator monitors this and agrees a plan with the company to reduce the deficit where one arises and most have arisen because of government actions (eg cutting interest rates or forcing companies not to have a surplus in their schemes! It is no wonder companies have increasingly wound up their schemes.


Plus the fact that Tesco, Shell and the like are unlikely to go out of business any time soon, so they are I think justified in running with a relatively small deficit in their pension scheme because as scrumpyjack says, it will not take too much of an increase in interest rates and /or possible reduction in life expectancy for actuaries to change the parameters for the valuation and find that the deficit has vanished. DB schemes of course are mostly in what might be described a s 'run off' situation with no new members in most and so eventually, the deficit will I assume catch up with them. But I am no actuary and have not really tried to think this through.

Dod

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Re: New pension deficit rules putting dividends at risk

#467228

Postby tjh290633 » December 19th, 2021, 12:01 pm

You may recall, Dod, that it was not unusual for companies to have to stop making payments to DB schemes because they were actuarily in such a large surplus.

TJH

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Re: New pension deficit rules putting dividends at risk

#467249

Postby monabri » December 19th, 2021, 12:38 pm

Do ( did) LCP publish a report that is freely available ?

I used to download the defined benefit pension reports from Jardine Lloyd Thompson (JLT). JLT published two reports, one for FTSE100 and one for FTSE250 companies. It tabulated pension assets v liabilities, deficit as a percentage of the company's market value, pension contributions, percentage bond level, dividend. Each report was ~14 pages, with summary tables comprising 3 to 4 pages.





("LCP, a pensions consultancy, found 75 of Britain’s largest 100 companies were in pension funding deficits at the end of 2020 based on new, stricter calculations, up from 47 according to the old method.")

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Re: New pension deficit rules putting dividends at risk

#467252

Postby seagles » December 19th, 2021, 12:43 pm

tjh290633 wrote:You may recall, Dod, that it was not unusual for companies to have to stop making payments to DB schemes because they were actuarily in such a large surplus.

TJH

You beat me to it. Back in late 70's early 80's the company I worked for did exactly that. I know that since I left they have had to top it up though.

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Re: New pension deficit rules putting dividends at risk

#467289

Postby monabri » December 19th, 2021, 2:55 pm

seagles wrote:
tjh290633 wrote:You may recall, Dod, that it was not unusual for companies to have to stop making payments to DB schemes because they were actuarily in such a large surplus.

TJH

You beat me to it. Back in late 70's early 80's the company I worked for did exactly that. I know that since I left they have had to top it up though.


The employees also stopped paying as well I.I.R.C. ( pension holiday)?

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Re: New pension deficit rules putting dividends at risk

#467306

Postby Dod101 » December 19th, 2021, 3:48 pm

tjh290633 wrote:You may recall, Dod, that it was not unusual for companies to have to stop making payments to DB schemes because they were actuarily in such a large surplus.

TJH


Yes I do. I think it was really Gordon Brown's tax raid in 1997 that changed that, but I assume the point you are making is that things can change very quickly and if so I agree.

Dod


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