Carbon’s Pensions Director, Hazel Brown, provided some expert opinion in Jeff Salway’s excellent article in Saturday’s edition of The Scotsman.
Jeff was reporting on the news that some FTSE 100 companies are about to follow manufacturer Carclo’s recent announcement that its October dividend payment is unlikely to go ahead.
This warning comes just weeks after a study by actuarial consultants, Lane Clark & Peacock found that while FTSE 100 companies had paid out £71.8 billion to shareholders last year, they paid just £13.3 billion into their defined benefit (DB or final salary) schemes. It also highlighted that companies with high pension deficits could face regulatory action if they continue to make dividend payments.
The spotlight has clearly returned to DB scheme funding in the wake of what has happened at BHS and Tata Steel which prompted the work and pensions select committee to warn that the future of DB schemes was perhaps ‘the greatest challenge facing longstanding British businesses”.
The outlook has worsened following the recent EU referendum and a new round of quantitative easing by the Bank of England which drove down the gilt yields used by schemes to calculate how much they need to meet future liabilities. The net result of these recent developments is that many businesses will scrap dividends in favour of addressing their pension scheme deficits. Hazel commented, “We have already seen one company scrap a dividend in favour of addressing its pension scheme deficit. It is likely that more will feel the pressure to follow suit as scheme deficits grow.”
Hazel added, “This will have greatest impact on those who chase yield and rely on a small number of company shares to generate the dividend payments they need to meet their expenditure”.
Hazel also suggests investing on a “total return” basis. “This means that the ‘income’ you need is produced through a combination of natural income, such as interest payments or dividends, and encashment of units within the diversified investment portfolio,” she explained, “This approach is also very tax-efficient as you can utilise your annual capital gains tax allowance to withdraw funds efficiently and pay very little tax.”
Hazel also finished her contribution with some good news by predicting that reductions in dividends should be relatively temporary, and her final advice to investors is to focus on long-term investment solutions.
Jeff’s article is well worth a read, you can link to it here.
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You can view Hazel Brown’s profile here.