Dividends at some of Britain’s largest companies – many of them likely to be a staple of your portfolio – could be at risk from ballooning pension deficits.
Huge final salary pension obligations have the potential to limit your investment returns, with tighter regulation and negative publicity surrounding the demise of BHS, the defunct retailer once owned by Sir Philip Green, already taking their toll.
Analysis by Telegraph Money shows that, of the 10 companies paying the highest dividends in Britain, seven have a pension deficit of more than £10bn, prompting concerns for the sustainability of payments to shareholders. Many of us will be investing in these companies through company pension schemes and other savings plans.
The deficit among FTSE 100 companies grew by £95bn in 2016 to £681bn, according to research released last week by pensions consultancy JLT Employee Benefits. Sixteen companies also reported a deficit of more than £10bn, while Royal Dutch Shell alone has a shortfall of £73bn.
Respected fund manager Alex Wright, who runs the Fidelity Special Situations fund, pays particular attention to companies with large pension deficits, describing them as an “albatross around the neck”.
While it is possible to argue that pension deficits are merely an accounting concept, they do pose risks. “They are definitely something to be aware of and are important,” said Laith Khalaf, an analyst at Hargreaves Lansdown, the fund shop.
“You have some companies with very big pension deficits and that is undoubtedly a risk. “That said, companies tend to have long-term funding plans with their trustees. I know interest rates aren’t going anywhere fast but the only direction is probably up, and that could help solve the problem, although people have been saying interest rates will go up for years and they have gone down or stayed the same.”