Beware of possible Pension & Dividend Cuts?

No not another alarmist warning from the Project Fear / Remain camp in the EU referendum but a warning from Work and Pensions committee chairman Frank Field who plans to put a radical new bill before MPs, which could see defined benefit pension scheme members face cuts to their promised retirement incomes, according to this article on FT Adviser.com. In addition to saying:

"Members of final salary company pensions must face the fact their schemes may never meet their liabilities."  Mr Field is also planning a separate bill which would prevent companies paying out generous dividends at the expense of their employees’ pension schemes, so shareholders beware if your company has large pension liabilities and or a pension deficit.

Which is all quite topical with the recent financial problems at Tata Steel & BHS which include problems in dealing with their large pension deficits. Indeed in the above article he apparently said: "New rules are needed in light of the collapse of BHS in April, he said, which exposed a pension deficit at the company of half a billion pounds."Mr Field also suggested The Pension Regulator or the Pension Protection Fund could monitor company payments via dividends versus payments to its pension scheme. So it sounds like the political and regulatory environment could well become more difficult or hostile towards dividend where the sponsor has large pension liabilities or a deficit.

Which set me thinking about those companies that are vulnerable to this background and which might be worth avoiding on that basis. Searching around I found the following articles which mention some of the likely candidates like International Airlines Group (IAG), RSA & RBS. The first is from City AM looking at FTSE Companies and the other from the Daily Telegraph looking at FTSE 250 Companies with 17 Companies identified having pension plans that dwarf their stock market value and represent “a material risk to their sponsors”.
First Group topped the list along with some other well known names names such as  AMEC, Balfour Beatty, Cable & Wireless, Carillion, Mitchell & Butlers, Stagecoach & Tate & Lyle. I note however that Rexam was on the list but that has not stopped it or AGA a little while ago from being bid for, so not an insurmountable problem in some cases I guess.

The City AM article referenced a recent JLT  Employee Benefits’ quarterly report on the FTSE 100 and their pension disclosures. I couldn't find an up to date one of these but managed to get hold of one from a couple of years ago from which the picture at the end is taken, although worth checking the up to date positions of the individual stocks mentioned in all these. I haven't seen any lists for small cap firms, but the same issues would apply and may be even more so.

I would definitely say it is worth thinking about this issue carefully going forward as it could have quite a serious impact on your shares and dividends if you hold any of the likely candidates going forward and as always say you pay your money and take your choice, but whatever you decide, mind how you go.

FTSE 100 Pension Deficits Click to enlarge