Cut in dividends would fix pension fund deficits in a year

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The Independent Online

The findings from accountancy firm KPMG, however, also highlighted the role that stock market volatility can play in the waxing and waning of pensions gaps, suggesting that companies would do better to use hard assets or other alternatives to surplus cashflow to plug their pension fund holes.

"The deficits are extremely volatile, so companies might well put in too much cash. Once you put it in, you can't get it back," said Alistair McLeish, head of pensions at KPMG. "I expect more companies to use contingent assets to [secure fund shortfalls]."

KPMG's findings follow a discussion paper that the Pensions Regulator published last Friday after a year-long review of fund reporting and accounts.

The watchdog recommended several measures to promote transparency, including regular pronouncements on funding positions, risk management strategies, and the recovery schemes in place in the event of a company failure.

The discussion paper also concluded that a "majority" of under-funded pension schemes would have to include some kind of contingent asset plan - a legal arrangement that sets aside business units or physical assets, such as a company HQ or office buildings, to be immediately transferred to the pension fund if the parent group goes under. MFI, the struggling furniture retailer, became one of the first UK companies to make such a plan earlier this year when it gave its pension fund first dibs on its profitable Howden Joinery unit, in the event of it failing.

Mr McLeish said he thought that more companies would go down this route because it also lessens the likelihood of their ending up with plans that become over-funded when stock markets rise. "There are better things to do with their cash," said Mr McLeish.

Indeed, KPMG found that at the end of last year 25 per cent of the FTSE 250 would have been able to pay off their pensions shortfalls within a year. By the end of April, that number had risen to 37 per cent as the market roared ahead. After a tumultuous May, only 31 per cent could make that claim. More than half of the FTSE 250 - 56 per cent - could close their pension gaps with in three years.

Consumer goods companies were in the best shape to pay off pension shortfalls, said KPMG, while utility companies were the worst with just a quarter producing enough discretionary cash to pay off pensions in less than a decade. KPMG defines discretionary cashflow as income left over after subtracting interest, dividends, tax and capital maintenance payments.