FTSE 100 Pays Six Times More In Dividends Than Into Pension Schemes

How you choose to look at the numbers, and the values you hold, dictates what you highlight around accounting, pensions and corporate governance. There's a year-end accounting surplus at the UK's biggest companies for the first time since the financial crash of 2007/08, according to a report just out. But, as it points out, FTSE 100 companies continued to pay more in shareholders dividends than pension contributions, and there are also balance sheet accounting changes that might provide a nasty shock in the not too distant future.

FTSE 100 pension plans have moved from a £31 billion deficit into a £4 billion surplus, says the report from Lane, Clark & Peacock, which analysed pension disclosures. But its lead author and LCP partner Phil Cuddeford says: "History has proven that such accounting surpluses can quickly be wiped out by deteriorating market and economic conditions. On trustees' typical pension scheme funding basis, significant deficits remain, and the persistent gap between dividend payments and scheme contributions is likely to be scrutinised more intensely in the wake of the high-profile collapses of Carillion and BHS."

One would certainly hope so, given the renewed emphasis on corporate governance in the UK. There's that 'deteriorating market and economic conditions' Brexit scenario to contend with as well. Also, the entire edifice of accounting and audit is under scrutiny.

The LCP report suggests that some companies may find a pensions accounting surplus brings new challenges. For example, it says, where they are still paying deficit contributions, some company directors will need to clearly communicate the apparent contradiction- between an "accounting surplus" and a "funding deficit" - to various stakeholders including credit and equity analysts, regulators and shareholders.

This could get interesting. There is more.

The report notes the potential impact of looming changes (detail as yet unknown) to accounting standards - known as IFRIC 14 - when it comes to the health of FTSE 100 balance sheets. It suggests that for some companies this could threaten the ability top pay dividends or raise capital, and "may increase regulatory capital requirements in the financial sector."

It adds that the announcement  in February this year of new IAS 19 accounting rules will "significantly change" how some companies  account for 'special events' like changes to the benefits offered " in un-intuitive and surprising ways."

"If balance sheet accounting changes go ahead as feared, the FTSE 100 are likely in for a nasty shock. There are some companies which could be exposed to balance sheet hits of well over £1 billion, a stark reality not likely to be well received by either markets or shareholders" said Mr Cuddeford.

The report outlines the many disparate reasons for the improved overall accounting position at FTSE 100 companies today. But as it points out, company profitability "does not appear to be a key driver when it comes to determining the level of company contributions."

"Public interest" has been cited by the UK's accounting regulator, the Financial Reporting Council (FRC), in announcing the latest details on the investigation into the Carillion collapse.  The FRC is itself under a major review, and an expert advisory group for that review has now been announced.

Meanwhile, the FRC also recently published a thematic review on 'audit culture', the first of its kind, urging them to "do the right thing in the public interest."

Is "public interest" becoming the new buzzword for corporate governance in the UK's companies ? If it is, then we should be focusing on the warnings in this LCP report, and looking harder at the calculations that yield an accounting position of 101%.

I wrote a chapter around pensions and corporate governance in a book published in 2017 by what was then the Centre for Progressive Capitalism. It's a subject I had previously explored on Forbes which I contributed to for four years. There are many changes afoot in business models and the way we work today, and reasons for a declining sense of security around pensions. But how businesses approach their pension schemes is surely critical to their corporate governance.