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UK pension funds hit by dividend downturn

As we covered in one of our earlier articles, the average UK company dividend fell by 15% during 2009 compared to 2008. Even though dividend payments still totalled £57 billion in 2009 the £10 billion shortfall compared to 2008 has and continues to hit pension funds hardest. These are investment vehicles which offer some tax advantages as well as long-term investment strategies which tend to depend more than most on reinvested income.

While you may wonder exactly how a 15% reduction in dividend income could have a long-term impact on pension fund values, this can be demonstrated in the principle of reinvested income. Many pension funds are obviously looking longer term for their returns and will quite often reinvest their dividend income where possible. If you consider an additional 15% income each and every year into the future and the income this will generate aside from the possibility of capital appreciation, then the situation begins to become a little clearer.

If this additional income is lost for the short to medium term then the overall investment return will be impacted in the short to medium term. When you consider the state of the UK pension industry this is the last thing which any investment manager would have wanted!

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