The Lemon Fool

There's an interesting news article doing the rounds this week regarding the potential impact of new UK Pensions Regulator powers, that may well influence future dividend payments from UK companies that run Defined Benefit pension schemes, and especially where those schemes may be suffering from large deficits -

New powers soon to be enjoyed by the Pensions Regulator (TPR) could see a big impact on dividends paid out by corporations with responsibility for a defined benefit (DB) pension scheme. The change will impact all DB scheme sponsors, not just large FTSE 100 companies.

Under the new rules, which will come into play on 1 October, company directors and others involved could face a legal challenge if a dividend payment leads to a ‘material reduction’ in the recovery that a DB pension scheme could expect in the event of a hypothetical insolvency.

According to consultancy LCP, where directors of companies with a DB scheme wish to pay dividends, and where a company’s DB scheme has a deficit, directors should analyse the impact of dividends on the DB scheme at an early state of discussions.

Analysis by LCP found the new rules could slow the pace of dividend recovery after payouts were depressed during the pandemic to just over £70bn in 2020, down from around £110bn in 2019.

So far in 2021 there has been a recovery in dividend payments, however TPR’s new rules could see that change.

https://www.moneymarketing.co.uk/news/beefed-up-tpr-powers-expected-to-pour-cold-water-on-dividend-bubble/

I know that pension deficits are often scrutinised and used as pre-filter metrics for many investors anyway, but for those income-investors who may not have taken much notice of such deficits in the past, where they might exist, then this new rule-change may be a useful trigger to start doing so...

Cheers,

Itsallaguess

LCP...? Lane, Clarke & Peacock...possibly. https://www.lcp.uk.com/ (I'm guessing that the LCP referred to is them).

is this a story for a slow news day?
they hardly exist anymore
https://money.cnn.com/retirement/guide/ ... index7.htm

pje16 wrote:is this a story for a slow news day?
they hardly exist anymore
https://money.cnn.com/retirement/guide/ ... index7.htm

No, but the deficits do. I expect this may accelerate the off loading of the remaining liabilities to a bulk annuity buyout organisation like Legal & General if they will take them on at a reasonable price.

Dod

The article by LCP referred to by IAAG ends;

"Depending on how companies react, we could see the 2021 ‘dividend bubble’ burst in a matter of weeks.”

I can't see any company management teams cutting dividends unless absolutely forced to - look what happened to "value stocks" share prices when the Covid cuts were in place. Moreover, these pension regs were being considered (*) before Covid 19 came along - did recent dividend cuts take this upcoming regulation into account in rebasing dividend levels ?

As an aside: I noted in a search this morning that the same article was also being published in a Californian journal....the power of the Internet. That might frighten off the US investors and hedge funds.


(*) If I was aware of the impending regs then surely the management boards were ( I've been missing the JLT reports!).

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viewtopic.php?p=355497#p355497
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Itsallaguess wrote:
I know that pension deficits are often scrutinised and used as pre-filter metrics for many investors anyway, but for those income-investors who may not have taken much notice of such deficits in the past, where they might exist, then this new rule-change may be a useful trigger to start doing so...

Well it depends on what you mean by "scrutinised" and the filtering method. I am not aware of many investors that look at pension deficits, and those that do appear to live by the mantra "deficit = bad" as their analysis. How many do you think actually look at the assets and liabilities and assumptions that drive those reported deficits and analyse if those 3 factors represent investment opportunities or not?

dealtn wrote:

Itsallaguess wrote:
I know that pension deficits are often scrutinised and used as pre-filter metrics for many investors anyway, but for those income-investors who may not have taken much notice of such deficits in the past, where they might exist, then this new rule-change may be a useful trigger to start doing so...

Well it depends on what you mean by "scrutinised" and the filtering method. I am not aware of many investors that look at pension deficits, and those that do appear to live by the mantra "deficit = bad" as their analysis.

How many do you think actually look at the assets and liabilities and assumptions that drive those reported deficits and analyse if those 3 factors represent investment opportunities or not?

Pension deficits have been mentioned fairly frequently over the years, both here and back in the Motley Fool days, although clearly it's difficult to know just what level of investigation is carried out.

If the word 'scrutinised' is causing any difficulty, I'm happy to pretend I said 'looked at', if that helps, as that was really the underlying intention anyway...

Cheers,

Itsallaguess

Itsallaguess wrote:

dealtn wrote:

Itsallaguess wrote:
I know that pension deficits are often scrutinised and used as pre-filter metrics for many investors anyway, but for those income-investors who may not have taken much notice of such deficits in the past, where they might exist, then this new rule-change may be a useful trigger to start doing so...

Well it depends on what you mean by "scrutinised" and the filtering method. I am not aware of many investors that look at pension deficits, and those that do appear to live by the mantra "deficit = bad" as their analysis.

How many do you think actually look at the assets and liabilities and assumptions that drive those reported deficits and analyse if those 3 factors represent investment opportunities or not?

Pension deficits have been mentioned fairly frequently over the years, both here and back in the Motley Fool days, although clearly it's difficult to know just what level of investigation is carried out.

If the word 'scrutinised' is causing any difficulty, I'm happy to pretend I said 'looked at', if that helps, as that was really the underlying intention anyway...

Cheers,

Itsallaguess

I'm agreeing with you not quibbling.

As an investment community this "trigger" should scrutiny, or at least, as you say, a "start ..." for people to consider it. Even if this removes some of the successful niche opportunities such a lack of scrutiny in the past has created. Markets are demonstrably not "perfect" in reflecting all known information into "correct" pricing in my opinion.

dealtn wrote:
As an investment community this "trigger" should scrutiny, or at least, as you say, a "start ..." for people to consider it.

Even if this removes some of the successful niche opportunities such a lack of scrutiny in the past has created.

Markets are demonstrably not "perfect" in reflecting all known information into "correct" pricing in my opinion.

Yes, and I think you touched on a good point earlier when you implied that simply seeing 'deficit=bad' won't always tell the full story, and it might well be the case that where legacy deficit issues exist with now-closed Defined Benefit schemes, then so long as the underlying business is able to successfully deal with the deficit, even if that may take a number of years, then with the issue being of a somewhat 'closed' nature, there may well be valid investment opportunities, given that long-term and regular cash outflows that have previously gone to support those legacy deficits are likely to be useful for more productive uses at some stage, if and when such issues are finally managed out...

In that area, pressure like this from the pensions-regulator might, whilst at first reading looking like a 'bad thing', actually turn out to be just the sort of influence that some of these companies need to make them focus on the issue itself, for the longer-term good of some of these businesses...

Cheers,

Itsallaguess

It is something most investors have known for a very long time is a major factor to consider. I pointed out the issue re BT back in June.

"It is often said that BT is a pension fund with a hobby.

It has a market cap of £19 billion but a pension fund with liabilities of about £63 billion and assets of about £55 billion. There are 300,000 members of the pension scheme.

I'm surprised that the pension regulator allows any dividends to be paid and one might take the view that the regulator could stop them anytime.

Anyway the scale of pension risk means IMO it is very hard to judge the investment merits of the trading business and one should not assess the investment case without considering the pension risk."

One needs to look at the gross position, not just the net of assets-liabilities, to assess the risk.

It should not be forgotten that many pension fund "deficits" are an artefact of accountants using current interest rates to assess the probable return, and for annuities to be likewise affected. If interest rates rise, as they may well, then many of the so-called deficits could vanish in a flash. Then you will have pension funds in surplus and the companies involved be prevented from contributing to them. We have been there before if you remember.

TJH

tjh290633 wrote:It should not be forgotten that many pension fund "deficits" are an artefact of accountants using current interest rates to assess the probable return, and for annuities to be likewise affected. If interest rates rise, as they may well, then many of the so-called deficits could vanish in a flash. Then you will have pension funds in surplus and the companies involved be prevented from contributing to them. We have been there before if you remember.

TJH

Unfortunately governments find negative real rates (and very low nominal rates) extremely helpful and would be very reluctant to move rates higher. Pension funds are collateral damage and I can't see that changing anytime soon.

Feb 7th 2021

https://www.pensionsage.com/pa/FTSE-100 ... vid-19.php

FTSE 100 IAS19 pension funding positions have “fully recovered” from the fallout of the Covid-19 pandemic with a combined surplus of over £50bn, a £10bn increase compared to March 2020, according to analysis by LCP.

(LCP.....now where've I heard that company name before ?.... ! )

The group’s newly launched FTSE 100 Pensions Explorer revealed that the surplus for FTSE 100 companies' defined benefit schemes has “soared” over the first half of the year, increasing from £10bn on 31 December 2020 to £52bn as of 30 June 2021

"It also found that there are just 11 FTSE 100 companies that are estimated to have an accounting deficit as of 30 June 2021.

LCP partner, Jonathan Griffith, stated that FTSE 100 companies can "breathe a sigh of relief" now that pension positions have recovered following the volatility and uncertainty of the past year, suggesting that many companies may look to "seize the opportunity", and consider proactively de-risking their pension schemes,"

:

and we have a report 11th June 2021

https://www.proactiveinvestors.co.uk/co ... 52090.html

"About half of FTSE 100 companies have pension deficits with BT Group PLC (LON:BT.A), Shell, BAE, GlaxoSmithKline and AstraZeneca among those with shortfalls in the billions for which they are liable."


So, In Feb 2021 things were looking rosier...and then by June 2021 we have "about half of FTSE100 companies have pension deficits".


And in June 2021

https://www.sharesmagazine.co.uk/articl ... -dividends

naming RD Shell, AZN, GSK, PHNX, BAE , BT and TSCO (all EPICS pretty commonplace on this board).

We've seen how BAE Sytems have markedly closed their funding deficit with a £1bn bond placement ( viewtopic.php?p=438401#p438401 ) so I wonder how up to date these reports actually are and maybe there is some crying of "wolf" ?

scrumpyjack wrote:

tjh290633 wrote:It should not be forgotten that many pension fund "deficits" are an artefact of accountants using current interest rates to assess the probable return, and for annuities to be likewise affected. If interest rates rise, as they may well, then many of the so-called deficits could vanish in a flash. Then you will have pension funds in surplus and the companies involved be prevented from contributing to them. We have been there before if you remember.

TJH

Unfortunately governments find negative real rates (and very low nominal rates) extremely helpful and would be very reluctant to move rates higher. Pension funds are collateral damage and I can't see that changing anytime soon.

Fortunately nominal and real rates aren't determined by the government.

Itsallaguess wrote:There's an interesting news article doing the rounds this week regarding the potential impact of new UK Pensions Regulator powers, that may well influence future dividend payments from UK companies that run Defined Benefit pension schemes, and especially where those schemes may be suffering from large deficits

When the govt became the pensions backstop, it was only a matter of time before they began interfering.
I'm surprised it's taken this long.
In the past I've unloaded BT and BAE on account of their deficits.

Didn't realise Phnx had one, seems rather funny as they are a bulk buyout organisation as referred to by Dod.
You'd think that a clever accountant could find a way to sell themselves their own runoff.

V8

Phoenix Group
https://www.investegate.co.uk/phoenix-g ... 00144087R/

"Group's four main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme ('Pearl Scheme'), the PGL Pension Scheme, the Abbey Life Staff Pension Scheme ('Abbey Life Scheme') and the ReAssure Staff Pension Scheme ('ReAssure Scheme') and explains how the pension asset/liability is calculated."

Pearl (254m)
PGL (1719m)
Abbey Life (61m)
ReAssure +11m & (2m)....... two funds

However!

The Pearl Scheme and the PGL Pension Scheme have both executed buy-in transactions with a Group life company and subsequently assets supporting the actuarial liabilities are recognised on a line by line basis within financial assets in the statement of consolidated financial position.

I might be wrong here..it looks like plans are in place to support the main deficits. [Comments].

Assuming the trustees have agreed the plan then they should not object to dividend payments.



Brackets= negative values

monabri wrote:
so I wonder how up to date these reports actually are and maybe there is some crying of "wolf" ?

I think any potential for mixed messaging might sometimes be related to the fact that proper 'actuarial valuations' of these types of pension schemes are often only carried out every so many years (two or three, I think, in the case of my employer..), so that might lead to some amount of 'stepped reporting' on these issues, depending on just which figures (last actuarial valuation / most recent company top-up payments etc...) might be used in these types of reports, but you're right - it's often difficult to pin things down in a way that's got any read-across between different data-sources...

Cheers,

Itsallaguess

dealtn wrote:

Itsallaguess wrote:
I know that pension deficits are often scrutinised and used as pre-filter metrics for many investors anyway, but for those income-investors who may not have taken much notice of such deficits in the past, where they might exist, then this new rule-change may be a useful trigger to start doing so...

Well it depends on what you mean by "scrutinised" and the filtering method. I am not aware of many investors that look at pension deficits, and those that do appear to live by the mantra "deficit = bad" as their analysis. How many do you think actually look at the assets and liabilities and assumptions that drive those reported deficits and analyse if those 3 factors represent investment opportunities or not?

They can scare investors, years ago when I more followed HYP I would not touch BT because of what was in their accounts note re their schemes.