Pension Deficits See Solution in Huge Dividend Cuts

Investors of BAE, BT and Barclays may face the consequences of possible dividend cuts to address the growing pension deficits of many multinational companies in the United Kingdom.

Small-cap plastics manufacturer Carclo warned the industry that its pension deficit troubles may be faced by other multinational companies including BAE Systems, GKN and G4S, the security group.

“Carclo could be the canary in the coal mine and the precursor to dividend cuts at other groups,” says Matthew Beesley, head of global equities at Henderson Global Investors. “Companies are diverting more cash for pensions as a black hole is opening up. More money is needed to meet pension benefits, which means there may have to be cuts in dividends.”

The Pension Protection Fund said Tuesday that UK’s DB schemes for 6,000 companies have increased in deficit figures up to £459.4bn last August, which is above its £376.8bn a month earlier.

Henderson has sold its shares in BT because it worries the company’s large pension deficit will hit the equity price and force the group to cut its dividend, says Mr Beesley.

“Companies will hold off from making dividend cuts for as long as they can, but the fall in bond yields does not look temporary,” he adds. “We are close to the point for some companies where they either reduce the dividend or cut investment.”