Effect of pension obligation increase on parent’s distributable reserves resulting in non-payment of dividend

Carclo plc – Annual report – 31 March 2017

Industry: manufacturing

finance director’s review (extract)

Dividend

On 31 August 2016 the Group announced that subsequent to the EU Referendum result on 23 June 2016, there had been a sharp reduction in the corporate bond yield used to discount the Group’s pension liability under IAS 19 which is held within the Group holding company, Carclo plc (“the Company”). The Group announced that if the corporate bond yield remained at that level then this would result in a significant increase in the Group’s pension deficit as at 30 September 2016, extinguishing the Company’s distributable reserves. As a result of this, the Company would not be able to pay the final dividend of 1.95 pence per share, declared on 7 June 2016, and payable on 7 October 2016 to those members that were on the register at 26 August 2016. For this reason, this dividend was not paid on 7 October.

Since 30 September 2016, corporate bond yields increased modestly contributing to a reduction in the Group’s IAS19 net deficit of £15.6 million, with a resulting positive impact on the Company’s reserves. In addition, measures were taken to distribute reserves from UK subsidiaries to the Company and this involved a number of capital reduction exercises relating to those subsidiaries’ transition to FRS 101. At 31 March 2017, the Company’s reserves were £22.4 million (2016 – £7.9 million). However, it should be noted that a 0.25% reduction in the 15 year AA rated corporate bond yield will increase the Scheme liability, and therefore the Scheme deficit by approximately £7 million and such a reduction would have a similar negative impact on the Company’s reserves.

The Board recognises the need to reward shareholders and for them to participate in the growing profitability of the business and it intends to recommence dividend payments in the 2018/19 financial year provided that the level of distributable reserves is sufficient that such a sustainable and regular dividend can be reintroduced.

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