The Ossett-based firm said corporate bond yields had decreased materially in the UK following the Brexit vote. The yields are used to discount the group’s pension liability and if the yield remains at current low levels this will result in a significant increase in the group’s pension deficit.
Carclo said the increased pension deficit would extinguish its available distributable reserves, in which case the company won’t be able to pay the final dividend of 1.95p per share, which was declared in June.
Carclo said that whilst it is disappointed that the final dividend is unlikely to be paid due to these legal and accounting constraints, it intends to resume the company’s progressive dividend policy once legal and accounting circumstances allow.
Analysts warned that other companies could be hit in a similar way.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “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.”
Carclo’s shares closed the day down 27p at 130p, clouding an otherwise upbeat trading statement.
The group said it is trading well and in line with its expectations for the year ending March 2017.
It said its Technical Plastics division had a very good start to the financial year with demand from healthcare customers as expected. Following the award of additional production volume from a long term customer, it has approved the expansion of its Indian facility and this expansion should be completed by late next summer.
It said strategies to win new programmes to fill the expanded capacity at its new China facility are gaining traction, with some initial programme wins secured in the first half of the year.
In LED Technologies, its Wipac luxury and supercar lighting business performed well with good demand and all of the current design, development and tooling programmes are progressing as planned.
In addition, the Optics business has seen strong demand in the first half of the financial year.
The Aerospace division has seen stable demand so far this year and is expected to trade in line with expectations.
Carclo said it expects group debt to be a little higher in September than in March, primarily due to the impact of weaker sterling on the re-translation of its US dollar and euro denominated medium term loans.
However the group said it has made modest gains on trading and on the re-translation of overseas profits year on year due to the weakness of sterling.
Analyst Dominic convey at Peel Hunt said: “The group has enjoyed a strong start to the year with continued momentum within the two largest divisions.
“In the short term, this is overshadowed by news that the reduction in corporate bond yields and subsequent increase in the IAS19 pension deficit, is now expected to prevent dividend distribution.
However, we remain focused on the capacity expansion and new business pipeline that underpins our strong PBT growth forecasts to March 2019.”