Over half, 53, of FTSE 100 companies could clear their defined benefit pension scheme deficits if they withhold dividend payments for around two years, JLT Employee Benefits has found.

In its most recent quarterly report on FTSE 100 pension schemes, it found that just six FTSE 100 companies are spending more in contributions to their DB schemes than in dividend payments to their shareholders.

Only seven companies would need a payment of more than two years’ dividends into their DB pension scheme in order to clear the outstanding pension deficit on their balance sheet.

Furthermore, the research shows that only 54 FTSE 100 companies are still providing more than a handful of current employees with DB benefits (i.e. ignoring companies that are incurring ongoing DB service costs of less than 1 per cent of total payroll). Of these, only 23 companies are still providing DB benefits to a significant number of employees (defined as incurring ongoing DB service cost of more than 5 per cent of total payroll).

Overall, there is already significant funding being directed towards closing pension deficits. In the year to 30 June 2016, FTSE 100 deficit funding totalled £6.3bn, up from £6.1bn the previous year. BT led the way with a deficit contribution of £0.8bn (net of ongoing costs), but 49 other FTSE 100 companies also reported significant deficit funding contributions in their most recent annual report and accounts.

JLT Employee Benefits director Charles Cowling noted that there are a “significant number” of FTSE 100 companies where the pension scheme is a “material risk to the business”. Eight companies have disclosed pension liabilities greater than their equity market value.

“This is likely having a negative impact on equity prices and raises the radical question of whether it could make sense to erase pension deficits altogether by using funds that would normally go out as dividends or by borrowing from the capital markets,” Cowling said.

“There is a long-accepted principle of corporate finance known as the capital structure irrelevance principle that the value of a firm is unaffected by how it is financed - in the absence of the impact of taxes, bankruptcy costs and agency costs. In particular, this suggests that whilst shareholders clearly value dividends and don’t like surprises, the dividend policy of a firm should not affect its fundamental value.

“Moreover, pension deficits are in principle no different from other forms of debt finance, e.g. bank loans. However, for many companies, pension deficits are an inefficient source of debt finance, in particular, because of corporation tax relief on debt interest costs and on pension contributions. So, for many companies, it is more efficient for them to borrow in the capital markets than from their pension scheme by running a pension deficit.”

In addition, Cowling added that paying off a pension deficit can give a company leverage with the pension scheme trustees to encourage the trustees to carry out risk management exercises that can enhance shareholder value. These can include risk reduction strategies on the investments as well as liability management exercises.

“The good news aspect of all this is that it is clear that for the very large majority of FTSE100 companies, their pension deficits can be easily managed within the normal ongoing management of their capital structure – even for some of those with very large pension deficits,” he stated.

In the last 12 months, the total disclosed pension liabilities of the FTSE 100 companies have fallen from £614bn to £586bn. Ten years ago, the total disclosed pension liabilities were £407bn. A total of 16 companies have disclosed pension liabilities of more than £10bn, the largest of which is Royal Dutch Shell with disclosed pension liabilities of £57bn.

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