Why lining shareholders’ pockets is more productive than plugging black holes

The revelation by actuarial consultants Lane Clark & Peacock that 56 of the supposedly blue chip companies in the FTSE 100 index are running deficits totalling £46 billion in their defined benefit pension schemes puts the BHS story into a new perspective.

It tells us that the £571 million ‘black hole’ in the chain’s pension fund was by no means out of the ordinary — it is a small fraction of the deficits declared by the likes of BT, Tesco, BAE Systems and BP, even if it might have been mitigated by wiser decisions on the part of the scheme’s trustees and greater generosity on the part of former BHS owner Sir Philip Green. The truth is that the defined benefit pension model is a thing of the past, having been irreparably damaged first by Gordon Brown’s tax raid on pension funds’ dividend income and then by an era of ultra low interest rates and poor returns on equities.

But the actuaries’ findings raise interesting questions about the balance of companies’ responsibilities towards pensioners and shareholders. Criticism of Green focused on the fact that he and his wife extracted £400 million in BHS dividends before the pension fund fell into trouble. But the FTSE blue chips have gone on paying dividends to shareholders long after their deficits started to build up, and at five times the level of their pension scheme contributions. Many could have wiped out their deficits by redirecting all or part of their annual allocation of dividend cash. The Daily Mail says that means ‘the bosses of Britain’s biggest companies are more interested in lining shareholders’ pockets than plugging black holes’.

How big a sin is that, if it’s a sin at all? The subliminal idea that dividends are a form of ill gotten gain crept into public discourse during the banking crisis, when Governor Mervyn King appeared to equate them with bankers’ inflated bonuses.