31st August 2016
Plastics and medical products firm Carclo has shocked the market by cancelling its final dividend of the year blaming strains on its defined benefit pension scheme liability calculations exacerbated by Brexit.
The final dividend was announced on 7th June and was due to be paid on the 7th of October but has now been cancelled with the firm saying it lacks distributable reserves.
In a trading update to the market today, the firm said: “Subsequent to the EU Referendum result on 23 June 2016, corporate bond yields have decreased materially in the UK and, as this yield is used to discount the Group’s pension liability under IAS 19 “Employee Benefits”, 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 sterling corporate bond yield has fallen from 3.37% on 7 June when Carclo made their dividend announcement, to 2.33% today. Over the same period, long dated Gilt yields have fallen from 2.01% to 1.16%
The statement adds: “This likely increased IAS 19 pension deficit would have the effect of extinguishing the Company’s available distributable reserves, in which case the Company will not be able to pay the final dividend of 1.95 pence per share, declared on 7 June 2016, on 7 October 2016 to those members that were on the register at 26 August 2016. Whilst the Board is disappointed that the final dividend is now unlikely to be capable of being paid due to these legal and accounting constraints, it intends to resume the Company’s progressive dividend policy once legal and accounting circumstances allow.”
Tom McPhail, Hargreaves Lansdown head of retirement policy says: “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 and for any individuals looking to buy an annuity. 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.”