Growing pension deficits and the expenditure decisions of UK companies

Philip Bunn, Pawel Smietanka () and Paul Mizen
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Pawel Smietanka: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 714, Bank of England working papers from Bank of England

Abstract: Large deficits have opened up on defined benefit pension schemes in the United Kingdom since 2007, and at the same time investment expenditure has been subdued; this is a common phenomenon in other countries too. We use privileged access to a unique new data set from The Pensions Regulator and two identification schemes to investigate the effects of deficits and deficit recovery plans on UK companies’ dividends, investment, wages and cash holdings. Identification is based on the close relationship between low long-term interest rates and pension deficits; and the external regulation of pension schemes by The Pensions Regulator. We show that firms with larger pension deficits voluntarily pay lower dividends, but they do not invest less. However, firms that are required to make deficit recovery contributions by the regulator have lower dividend and investment expenditure compared to other firms, and more so if they are financially constrained. These effects are large for some individual companies, but macroeconomically small compared to the stimulus offered by the Bank of England’s quantitative easing policy.

Keywords: Pension deficits; investment; dividends; cash holdings; monetary policy (search for similar items in EconPapers)
JEL-codes: E22 E52 G31 G35 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2018-02-26
New Economics Papers: this item is included in nep-age and nep-eur
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Citations: View citations in EconPapers (4)

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Working Paper: Growing pension deficits and the expenditure decisions of UK companies (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0714

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