Growing Pension Deficits and the Expenditure Decisions of UK Companies

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