For the last couple of weeks I have been writing about the state of final salary pensions and the fact that a large number are in deficit and their future very unsecure.
The latest to add to the list is the UK arm of Toys R Us. Regulators are monitoring Toys R Us amid fears its pension deficit could be jettisoned into the Pension Protection Fund. The concerns arose following the revelation that the British arm of the US-owned group has launched an emergency sale process and is being circled by restructuring firms.
Toys R US has a £74.3 million pension deficit as calculated by the Pension Protection Fund which is likely to have to pick up the pieces if the company fails. The immediate funding requirement for the pension fund is understood to be around £30 million, a bill which would ultimately have to be footed by pension savers via pension funds that plug holes in schemes run by failed companies.
It is worth noting that a pension blackhole could be a sign that your dividends and shares could be at risk, a particular warning sign is when the firm has a large pension black hole compared to the overall company size.
Prior to its collapse, Carillion was yielding a hefty 7.7 per cent – more than double the FTSE All Share. Russ Mould, investment director at AJ Bell, says: ‘Carillion’s yield drew a lot of income-seekers to their doom. ‘The dividend was cut to zero as the profit warnings rained in and the shares collapsed.
This week it emerged that Carillion bosses were warned about the damage that spiralling debts were doing to its pension fund as far back as 2012, even as the company continued to pay out chunky dividends to shareholders.
Donald Maxwell-Scott, technical investment manager at broker Rowan Dartington, warns: ‘Pension deficits are presenting more of a threat to a company’s health, with as many as one in ten FTSE firms struggling with a ballooning deficit. ’The main reasons for this are low interest rates, low bond yields and rising life expectancy – it means it is harder to grow money invested in pension schemes while they also have to pay out for longer than ever before.
Research by Canaccord Genuity shows at least three FTSE 350 firms have a larger pension deficit as a proportion of their market capitalisation than Carillion did. The AA has a pension deficit equivalent to an eye-watering 42 per cent of its £940m market capitalisation and, at the same time, has a dividend yield of 6.1 per cent. Tesco’s deficit, meanwhile, is equivalent to 39 per cent of its £17billion valuation and BT’s 38 per cent of its £26billion market cap.
Startlingly, Maxwell-Scott adds: ‘If BT’s pension deficit was a company, it would be large enough to be in the FTSE 100.’
If you are investing in Companies because of their dividend pay-outs then it is vital you do your homework before buying shares in any company. Key things to look at are a firm’s net debt (including Pension), cash flow and dividend cover.
A large pension deficit isn’t a definite sign you should avoid investing in a company, if interest rates continue to rise over the next few years there is a possibility that the gaping holes in these funds could narrow. Still, I would always check that companies are working at plugging any gap in their scheme.
This week, for example, defence-technology company Qinetiq revealed that after making recovery payments to close the deficit, its pension scheme was back in surplus, while BT is working on a pension settlement with staff which could reduce its liabilities.
* source Daily Mail Newspaper
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