Of dividends and deficits

You may have seen headlines last week revealing that ‘Britain’s biggest companies paid their shareholders five times more than they spent tackling their pension deficits last year’. This was the conclusion the media drew from a report by LCP, the actuarial consultancy, looking at how FTSE 100 companies manage their pension risks.

The conclusion that you might draw from these headlines is that large companies are recklessly providing short-term gratification to shareholders at the expense of the long-term wellbeing of both the company and its pensioners.

On the face of it, this is an example of directors reading only the bit of the Companies Act that says they have a duty to promote ‘the benefit of [the company’s] members’ and forgetting that it goes on to say that in doing so they must consider ‘the likely consequences of any decision in the long-term’ and ‘the interests of the company’s employees’, including its former employees.

For some companies that may be true. But if you have the time and inclination to look at the underlying data then a rather more nuanced picture emerges. And if you do not have the time and inclination, do not worry – we have done it for you!

Before getting to the analysis, I should make the obvious point that paying dividends is not in itself an example of ‘short-term’ thinking. If companies want sustained support and funding from their shareholders then they need to provide them with a return on their investment.

Where it becomes a problem is when there appears to be no parallel investment in securing the long-term future of the company, whether that is in order to reduce risk (including pension risk) or to generate future profits, for example by investing in R&D.

So when we analysed the LCP data we looked for evidence that companies had recognised the need to reduce their pension risk as well as satisfying the shareholders by providing a dividend.

The data shows that 43 of the 56 FTSE 100 companies that were running a pension deficit in 2015 had reduced the size of that deficit over the previous 12 months, and that a further seven companies had eliminated their deficit entirely over that period.

You might criticise those companies for apparent historical underinvestment in their pension scheme, and you can debate whether individual companies are reducing their deficits quickly enough. But it does appear that the current boards of those companies recognise the need to balance their – sometimes conflicting – legal duties and to address both short and long-term needs.

Arguably the same cannot necessarily be said of the boards of the 12 companies whose pension deficits increased, but who nonetheless paid generous dividends. Targeting those companies, and pressing them to explain why they felt this was appropriate, might be more productive than a broad brush condemnation of all companies.

Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance.

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