Growing Pension Deficits and the Expenditure Decisions of UK Companies

39 Pages Posted: 27 Feb 2018

See all articles by Philip Bunn

Philip Bunn

Bank of England

Paul Mizen

University of Nottingham; Bank of England; Centre for Economic Policy Research (CEPR)

Pawel Smietanka

Bank of England

Date Written: February 23, 2018

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

JEL Classification: E22, E52, G31, G35

Suggested Citation

Bunn, Philip and Mizen, Paul and Smietanka, Pawel, Growing Pension Deficits and the Expenditure Decisions of UK Companies (February 23, 2018). Bank of England Working Paper No. 714, Available at SSRN: https://ssrn.com/abstract=3130069 or http://dx.doi.org/10.2139/ssrn.3130069

Philip Bunn (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Paul Mizen

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5479 (Phone)
+44 115 951 4159 (Fax)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pawel Smietanka

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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