Around 25% of companies named in the FTSE 250 index could in theory pay off their defined benefit (DB) pension deficits within a year using discretionary cashflow, claims research from KPMG.
Following research by the firm in April on pension deficits in the FTSE 100, the latest study shows a quarter of the 105 companies surveyed could pay off the debt in a year, while 49% could pay it off in three years by using discretionary cashflow, also called disposable corporate income.
However the research points out around 28% of the companies surveyed lacked the necessary cashflow to clear their deficit and so would need to take action such as reducing capital expenditure or cutting back dividend distribution to try and clear the deficit over the medium term.
KPMG says the study also shows just how sensitive to market movements a company’s ability to pay off deficits is. The research is based on the position of the markets at the end of December 2005, but the firm says if it is recalculated based on the positions at the end of April and May 2006, there would be 3 different sets of results, which demonstrates the volatile effect markets have on company deficits.
Percentage of FTSE 250 companies able to pay off pension deficits
|Repayment period using discretionary cashflow||December 2005||April 2006||May 2006|
Of the companies which responded to the survey, KPMG says those in the consumer goods sector of the index are seen to be best placed to clear pension deficits, with over 90% theoretically able to clear them in 10 years, while utility companies are worst off, with just 25% able to clear their deficits within a decade.
Alastair McLeish, head of pensions at KPMG, says it is to be expected the next rank of companies below the FTSE 100 would have less ability to meet pension deficits than the largest ones, and the research has proved this to be true.
But he says while it is encouraging to see so many companies could clear their deficits quickly from current discretionary cashflow, there is the question whether it would actually be in the long-term interests of a company to do so.
McLeish suggests companies should manage cash which is committed to pension schemes very carefully, as given the sensitivities to market movements, companies risk overfunding under the new rules set out by the Pensions Regulator, if cash funding is simply a response to short-term market volatility.
Instead he says: “Contingent assets may be an option to minimise this risk and provide security to pension schemes in line with the Pension regulator’s requirements.”
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