Fifty per cent of companies named in the FTSE 100 index are theoretically able to pay off their pension deficits within a year according to research from KPMG Corporate Finance.
Based on a comparative analysis of the deficits of the FTSE 100 companies against their extra cash flow estimates, KPMG’s Pensions Repayment Monitor suggests over 70% are able to clear pensions deficits within three years.
However while 50% of companies can pay off deficits in one year, while around 20% of the FTSE 100 may need to think about talking additional measures in order to pay off their deficits over a longer time period.
KPMG says with pension fund contributions effectively passing through a “one-way valve”, becoming irretrievable in the event of a surplus, the challenge most of Britain’s companies face is deciding not ‘if’ but rather ‘how’ and ‘when’ to finance their pensions plan in the best interests of all stakeholders.
The research by KPMG’s Corporate Finance practice suggests while the majority of the FTSE 100 are not on the brink of a pensions “crisis”, they are still facing a compressed timeline, possibly as short as one or two years, in which to make crucial decisions which have huge financial implications for both their pension funds and future growth prospects.
Its report revealed 62.1% of the 66 qualifying FTSE 100 companies used in the survey, are covering their annual deficit payment with 20% of their expected surplus cashflow, based on the 10-year repayment plan recommended by the Pensions Regulator.
For 9.1% of companies, the minimum pension “deficit repayment” figure is between 20% and 33% of its expected surplus cashflow, which although not dangerous would impact on decisions on future capital expenditure and dividends plans.
However, 7.6% are deemed to be in a weak position, needing to use more than 33% of its surplus cashflow, while 21.2% have a negative pure discretionary cashflow, meaning unless they generate strong future cashflow, reduce capital expenditure and/or sell dividends or other assets, they will not reduce their pension deficits.
The report also illustrates the different techniques the FTSE 100 companies are using to try and plug the gap in their pension funds, with the deficits proving more problematic for different sectors.
It suggests utilities businesses have the highest level of gearing and therefore the least ability to raise further debt to solve the pensions deficit, while those in the basics materials sector have a low and rapidly improving indebtedness profile.
And KPMG says companies operating in heavily regulated sectors, such as utilities, are facing a pincer movement as the sector watchdogs prohibit price rises, while the Pensions Regulator is encouraging the repayment of pension funds.
Simon Collins, chief executive officer or KPMG’s corporate finance practice, says UK companies need to take back control of the pensions issue, as trustees have onerous new responsibilities and are rightly keen to ensure pension deficits are high on the board’s agenda.
But he warns this is sometimes confused with 'pressing the panic button' and immediately paying down deficits, which is often neither workable, or desirable, in practice, as although everyone acknowledges there is a pensions problem, it is not the same problem for each company.
Collins says: “The key point here is there is no ‘one size fits all’ when it comes to solving a pensions deficit problem. UK plc is facing other significant calls on available funds such as dividends, share buy-backs and merger and acquisition activity. Companies must retain the right to balance these competing cash demands in order to manage corporate strategy effectively for the long term.”
Alastair McLeish, head of pensions at KPMG, agrees saying companies must ensure both their funding and investment decisions take account of variables which can affect the value of a pension fund and the impact of cash diverted towards a fund.
He adds: “The pensions funding issue cannot be treated as a stand alone problem. Strategy on funding, tax and pensions needs to be overlaid with other considerations such as capital expenditure and acquisition strategy. Fund trustees should then be treated as any other creditor or lender, as part of a companywide strategy on the management of liabilities.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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