Plastics manufacturer Carclo has blamed the impact of falling bond yields on its pension liabilities for the likely cancellation of its final dividend in October.
In June it declared it would offer 1.95p per share, but today it said the dividend was under threat due to a “significant increase” in the group’s pension deficit, which has been exacerbated by the UK’s vote to leave the European Union.
In a trading update the London-listed corporate bond yields “decreased materially” following the Brexit vote, which took place several weeks after its final dividend was announced.
Sterling corporate bond yields have fallen from 3.4 per cent when Carclo announced its final dividend to 2.3 per cent today. Long-date gilts have fallen from 2 per cent to 1.2 per cent over the same period.
“If the corporate bond yield remains at its current low level then this will result in a significant increase in the Group’s pension deficit as at 30 September 2016,” the trading update stated.
Hargreaves Lansdown head of retirement policy Tom McPhail expects similar announcements in the months ahead “unless there is a sharp pick up in bond yields”.
“Current monetary policy may have kept the economy going but it is killing pension schemes,” McPhail says of the Bank of England’s interest rate cut and expansion of quantitative easing earlier this month.
He suggests the Bank of England could consider issuing higher-yielding pension bonds specifically for purchase by annuity providers and pension schemes.
Carclo said in the trading statement that the board intends to resume the company’s “progressive dividend policy once legal and accounting circumstances allow”.
This month Woodford Investment Management questioned why defined benefit pension schemes have been increasing their allocation to bonds over the last decade despite yields tumbling from 4.5 per cent to 0.56 per cent over the period.