Articles - Pension Funding Constraints and Corporate Expenditures


 This paper examines the impact of a company’s pension contributions on its dividend and investment policies. The effects of shocks to cash flows on these corporate expenditures are identified by changes to pension funding regulations. Using a sample of DB pension schemes in FTSE350 UK listed firms we find a strong negative relation between pension contributions and corporate dividends even after controlling for the correlation between funding status and unobserved investment opportunities. We find that the more stringent funding requirements under the Pensions Act 2004 had a more pronounced effect on both dividend and investment sensitivities to pension contributions.

 Recent legislation in the UK (Pensions Act 1995, Pensions Act 2004) has required companies to ensure that their defined benefit (DB) pension liabilities are appropriately funded through mandatory pension contributions. In response to the Maxwell scandal, the Pensions Act 1995 introduced a Minimum Funding Requirements (MFR) for sponsors of DB pensions, and the Pension Act 2004 strengthened the regulatory regime by introducing scheme-specific funding requirements and established the Pension Regulator with the powers to require companies to fully fund their pension liabilities. In the presence of financing pressures, meaning it is costly for companies to raise external finance, such regulations may impose constraints on company expenditures, since increased pension contributions will reduce the proportion of earnings available for investments and/or dividends payable to shareholders. It is well-known that in perfect markets these decisions are unaffected by financial considerations, but there is a large literature focusing on balance sheet adjustments in the presence of financial constraints (Hubbard, 1998). If required pension contributions act as a shock to cash flows, an increase in a firm’s pension contributions may influence other uses of the firm’s capital such as dividends or investments because otherwise the firm will need costly external finance.

 To download the full report click below.

 

Back to Index


Similar News to this Story

Has Trumps stance on ESG impacted its growth
The principles of Environmental, Social, and Governance (ESG) remain a prominent force in shaping corporate strategies worldwide, though their applica
March 2025 Edition of the Actuarial Post Magazine
The Spring Statement from Rachel Reeves was a little disappointing in its lack of clarity around pensions – not least the lack of clarity around the s
Devolution and LGR governance implications for the LGPS
2025 has got off to a hectic start for the LGPS with the ‘Fit for the Future’ consultation and planning for the year(s) ahead. That’s going to continu

Site Search

Exact   Any  

Latest Actuarial Jobs

Actuarial Login

Email
Password
 Jobseeker    Client
Reminder Logon

APA Sponsors

Actuarial Jobs & News Feeds

Jobs RSS News RSS

WikiActuary

Be the first to contribute to our definitive actuarial reference forum. Built by actuaries for actuaries.