Pension deficits still threaten these FTSE 100 dividends

Blue-chip pension deficits have fallen, but Brexit remains a 'material risk' and dividends could be cut. 

New research has found the pension liabilities of Britain's biggest businesses have slightly improved over a 12-month period to the end of June 2018. 

According to employee benefit provider JLT, the total disclosed pension liabilities of FTSE 100 companies has fallen by £27 billion to £683 billion over the period. It notes that this "prompted many sponsors to lock in gains with a move into bonds", which proved to be a case of good timing given the market turmoil that took place in the final quarter of 2018. 

It adds that eight FTSE 100 companies, including Severn Trent (LSE:SVT), Legal & General (LSE:LGEN) and Ferguson (LSE:FERG), increased their scheme allocation to bonds by more than 10% from the end of June 2017 to the end of June 2018. 

But, Charles Cowling, chief actuary at JLT, points out the good progress made could be hampered by a no-deal Brexit, which would likely lead to a stock market sell-off. 

He says: "Limiting volatility in pension schemes may prove crucial to UK companies over the next few months, a period which could bring untold challenges to even the largest, most resilient businesses. 

"While constituents with a significant proportion of revenues derived overseas will be relatively sheltered from the potentially negative currency implications of a no-deal Brexit, domestically focused companies have a tough road ahead of them." 

In the coming weeks and months, he adds that it will be important for trustees and their sponsors to "batten down the hatches and ensure their scheme is positioned appropriately". 

"For some, this may constitute a decision to take some risk off the table, while for others it may be case of building effective hedging strategies. Either way, in order to protect the good progress of 2018, it is crucial that schemes remain alert to the situation as it evolves," says Cowling. 

Despite the reduction in pension deficits for the FTSE 100 index as a whole, JLT points out that pension schemes continue to represent a material risk to several of the UK's largest companies. A total of 18 FTSE 100 companies have disclosed pension liabilities of more than £10 billion, the largest of which is Royal Dutch Shell (LSE:RDSB) at £74 billion. 

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At the other end of the scale 22 companies have disclosed pension liabilities of under £100 million; of those, 13 have no defined benefit liabilities. 

As Money Observer has previously highlighted, the size of a company's pension scheme deficit can affect the firm's health, because this debt has to be serviced, and that can undermine the company's ability to grow its dividends or fund investment in future growth. 

This has led some investors to argue that firms with big pension deficits are the "unexploded bomb in investment portfolios". 

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