Plastics manufacturer Carclo may stop dividend payments because of spiralling deficits – but is this a sign of things to come? And should we be worried? Sara Benwell explores

Out of control deficits have dominated national newspaper headlines over the past few months. So much so, that people outside of the pensions industry must surely know more about stressed pension schemes than ever before.


The latest company to grace the front pages is Carclo, a plastics manufacturer. In a trading update the company has warned it may stop dividend payments to shareholders as low corporate bond yields are causing its pensions deficits to spiral.

At 31st March this year, the pension deficit stood at £23.2 million almost doubling from £12.1 million in 2015. A combination of Brexit further depressing bond yields (which fell from 3.37% on 7 June when Carclo made their dividend announcement, to 2.33% today) coupled with the Bank of England’s decision to slash interest rates has worsened the plight of the scheme.

It seems likely that more companies will be forced to hold fire on dividend plans”

The widening deficit means the company is prevented by law from paying shareholders, even though it has enough cash.

Under UK law, companies are not allowed to pay dividends if they have no distributable reserves. Accounting rules state that pension deficits count against those reserves.

In March this year, Carclo had £7.9 million of distributable reserves, which was down from £18.7 million a year earlier. The £10.8 million drop was caused by an £11.1 million increase in its pension deficit to £23.2 million.

It’s hard to imagine that Carclo will stand alone. LCP’s recent ‘Accounting for Pensions’ report revealed that UK FTSE firms paid five times more in dividends than in pensions contributions, but it seems likely that more companies will be forced to hold fire on dividend plans.


LCP’s report revealed that UK FTSE firms paid five times more in dividends than in pensions contributions. 

But what does this mean? Should firms be reducing their dividend payments, or is there another solution to the deficit problem? In episode four of PI in a Pod, Sara Benwell speaks to one of the authors of the report, Bob Scott, to find out more.

Listen to the podcast here.

Already, the Pensions Institute is estimating that there are 1,000 schemes whose pensions deficits outweigh the value of the company itself, and the continued economic pressure on schemes is likely to push more companies ever closer to the precipice.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “We’re likely to see more of this kind of announcement in coming months, unless there is sharp pick up in bond yields. Current monetary policy may have kept the economy going but it is killing pension schemes, with disastrous consequences both for any employers sponsoring a final salary scheme.”

The frustrating thing for Carclo and other companies like it, is that many of them are trying to do the right thing by their pension schemes.

Carclo made pension contributions of £1.1 million (up from £1 million in 2015) in accordance with the previous recovery plan agreement with the pension scheme trustees. The group also paid the pension scheme administration costs of £0.6 million. A triennial valuation of the scheme was undertaken on 31 March 2015 and, based on this valuation, the group has agreed a revised recovery plan with the trustees. The recovery plan requires annual, index linked, contributions of £1.2 million to be made for a period of 3 years starting from  31 October 2016.

Sara Benwell spoke to Share Radio about the Carlco dividend reduction.

Essentially – the cash cost of the scheme is increasing. But despite throwing increasing amounts of money at the scheme, the deficit continues to widen. And Carclo isn’t the only company facing this problem. Bob Scott, author of LCP’s ‘Accounting for Pensions’ report explained: “The increasing cost of DB pension provision has meant that more contributions went towards additional pension accrual than in any year since 2009, This is despite the significant number of DB scheme closures, and a material reduction in the number of employees accruing DB pensions.”

The Carclo scheme also suffered at the hands of volatile equity markets. According to the 2016 annual report, the fair value of the scheme assets decreased to £173.7 million (from £189.0 million in 2015) reflecting the poor performance of equity markets during the year.

This raises a wider question about DB schemes and what companies can do to manage them”

However, the trustee board revised the investment strategy of the scheme accordingly, and trustees decided to invest in diversified growth funds. The new investment strategy should reduce volatility and this has been seen in the first 12 months since implementation.

The scheme is also trying to take advantage of de-risking strategies to increase certainty. In the 2016 annual report the company outlined that trustees are exploring liability management possibilities (including Enhanced Transfer Values) with assistance from JLT. In addition the group has recently offered eligible pensioners the option to switch from a pension with indexed linked pension increases to a higher fixed pension with no future increases.

This raises a wider question about DB schemes and what companies can do to manage them. One answer, which seems obvious in retrospect, is to encourage more hedging. Those pension schemes that had hedged against interest rates ahead of the Brexit vote were relatively inoculated from the outcome. However, it’s easy to see why trustees held off when all the signs suggested interest rate rises were around the corner.

And ceasing to pay dividends isn’t necessarily a good thing, even if  - in this instance - Carclo has little choice. If Tata Steel has taught us anything it is that companies failing as a result of out of control pensions is good for no one, especially not the members of the scheme.

We could see British business brought to its knees”

This begs the question – what can be done? One suggestion comes from McPhail. He proposed: “The Bank of England could possibly alleviate the situation by looking at issuing higher-yielding pension bonds specifically for purchase by annuity providers and pension schemes.”

Scott thinks that relaxing the rules on how pensions are increased may help, much like what is being suggested in the Tata Consultation. He said: “The government should end the uncertainty – the legal lottery – by allowing companies to move from RPI to CPI, subject to safeguards.”

Hopefully a credible solution will emerge from Frank Fields’ inquiry into the balance between meeting pension obligations and ensuring the ongoing viability of sponsoring employers.

Otherwise, it won’t just be shareholder dividends that are at risk – instead we could see British business brought to its knees.