View from City Road: The pensions monster looms large

Now here's something for Stephen Dorrell, financial secretary to the Treasury, to chew on. Emap, the publishing group, raised its dividend payments by 9 per cent last year - more than earnings per share, which grew by just 3 per cent, and pre-tax profits, which were up 8 per cent.

A classic case, you might think, for Mr Dorrell, self-appointed scourge of all those wicked companies that pay out too much of their profits in dividends. David Arculus, Emap's managing director, reckons dividend cover should typically be around 2.1 times but this payout reduces it to 1.9 times.

Not that this is a problem, he claims. It's simply a question of smoothing dividend payments over the cycle. Since Emap believes advertising revenues are beginning to pick up satisfactorily, and since it becomes highly cash-generative very quickly once this happens, there is no reason to wait. Why not reward shareholders with a spoonful of jam today rather than the whole pot tomorrow, he argues. It would be hard for Mr Dorrell to disagree. The fact of the matter is that there are some companies where relatively high dividend payments are entirely appropriate and some where they are not. As Mr Dorrell is now keen to concede, it is much better for the market than for the Government to decide.

Entirely predictably, Stephen Dorrell has been forced on to the defensive over his inquiry into why dividends have been high and rising. And it is not just the common ground he managed to establish with the Labour Party, which Lord Hanson says makes him sound like a socialist, that has made him change his tune. Mr Dorrell's real problem is that nobody accepts his protestations that his investigation is just a neutral fact-finding mission.

In the absence of direct controls on dividends, which Mr Dorrell has ruled out, there is only one reason for looking at the issue, and that is as the basis for a budget tax change. The obvious target is pension funds, which were clobbered for pounds 1bn a year by last year's cut in the rate of Advance Corporation Tax (ACT). This reduced the amount they could claim back, as non- taxpayers, from the Inland Revenue. Clearly, there is scope for another bite at that cherry.

The idea that this might be a benefit to industry, however, is so much nonsense. Reducing dividend flow to pension funds means their capital value automatically falls because actuaries use dividend streams to value funds. In turn that means contributions have to rise to provide the same level of pensions. Some of that extra burden will fall on the companies themselves. Any general move to lower dividends, to conserve money, has a similar effect on pension funds. For companies it becomes a case of in one pocket and out the other.

If the Government wants changes, it will have to come clean and defend them as a pension fund issue, not as some academic inquiry into dividends payout ratios. Not that this will be easy. Any attack on the pensions industry could also be construed as an attack on the Government's campaign to encourage private provision of pensions. As Mr Dorrell is rapidly discovering, the dividend issue is a many- headed monster. No doubt he regrets the day he ever let it out of the bag.