AbstractThe UK is the second country in the world that has the most significant number of Defined-Benefit (DB) schemes whose aggregate funding positions have been in a decline since the 2000s. To reduce the deficit in the schemes, companies are required to make deficit repair contributions (DRCs). This thesis focuses on DRCs as one of the deficit funding approaches and the role of Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) inside debt (DB pension) holdings in the deficit funding of DB pension schemes in the UK.
DB pensions are generally unsecured and unfunded liabilities of the company. This means that managers with DB pension holdings are exposed to risk similar to that faced by outside debtholders of the company. As such, agency theory (Edmans and Liu, 2012; Jensen and Meckling, 1976) suggests that DB pension holdings negatively impact manager risk-appetite. To the extent that the manager risks losing accrued DB pensions when there is a deficit in the pension scheme (inside debt becomes unsecured when there is a deficit and the manager would stand in line with other debtholders if the company bankrupts), it is expected that DB pension holdings will incentivise managers to reduce the pension risk in order to increase the security of their pension provisions. Building on this argument, this thesis examines whether CEO and CFO inside debt holdings are associated with a higher probability of making DRCs. Investigating the determinants of the DRCs alone may raise a question of whether these DRCs were effective at reducing the deficit in the pension schemes. The anecdotal evidence suggests that making DRCs does not always lead to higher funding levels . Therefore, given the objective of DRCs (DRCs are expected to reduce the deficit in the scheme), this thesis also examines whether CEO and CFO inside debt holdings are associated with the higher funding levels of DB pension schemes.
Examining the funding levels of DB pension schemes, this thesis empirically documents a positive association between CEO DB pension holdings and the funding levels of DB pension schemes. Examining the funding policy of deficit (DRCs), the thesis also documents that CEO DB pension holdings are associated with the higher probability of making DRCs. Additional analyses suggest that the effects of DB pension holdings are more pronounced when the CEO is closer to retirement. However, examining the role of CFO inside debt holdings, the analyses fail to find any statistically significant relationship between CFO DB pension holdings and the funding levels of DB pension schemes and between CFO DB pension holdings and the probability of making DRCs. Overall, the obtained results highlight the importance of CEO DB pension holdings in investigating the financial health of DB pension schemes.
The thesis also addresses the question of whether companies with high debt in the capital structure affect the contribution policy of DB schemes. Capital markets theory (Cooper and Ross, 2002) suggests that capital markets imperfections may induce a company to make lower pension contributions to the scheme (making lower pension contributions is considered as borrowing from the scheme members). Existing studies examining the relationship between debt and the funding policy of DB schemes provide contrasting results without there being provided reasons why companies more likely to underfund or overfund their pension schemes. This thesis argues that the pension regulation must be considered when examining the relationship between the capital structure and the contribution policy of DB pension schemes because the regulation must be regarded as an important motivator or, instead, demotivator for companies to use pensions as a source of funding. Given that UK pension regulation is less restrictive, which may incentivise companies to use pensions as a source of funding, this study tests whether UK companies reduce pension contributions when they are financially restricted. Consistent with this prediction, empirical analyses document that companies reduce pension contributions when they are financially constrained.
This thesis makes several contributions. First, this thesis contributes to the literature on corporate DB pension schemes. In particular, it provides empirically established evidence on the determinants of the health of DB schemes by examining whether funding levels and the funding policy of deficit are related to CEO and CFO DB pension holdings. Second, this thesis also contributes to the literature on the usefulness of inside debt holdings at reducing the risk inducing effects. Third, this study contributes to the literature by documenting that the effects of DB pension holdings become more pronounced when the CEO approaches closer to retirement suggesting that the importance of pensions increases in the age of the CEO. Fourth, this thesis contributes to the literature by examining the relationship between debt in the corporate structure and pension contributions. It is worth noting that this thesis is the first that examines different types of pension contributions – regular pension contributions and DRCs. These contributions differ significantly in their stated objectives, and thus it is important to understand the impact of debt on both - regular pension contributions and DRCs. Overall, this thesis contributes to a better understanding of the factors that influence the funding positions and the funding policy of deficit of DB schemes.
UK-based literature on DB pension funds is limited, which can be partly attributed to the lack of a comprehensive (readily available) database on DB pension characteristics. To this end, a unique feature of the thesis is the use of a hand-collected dataset from the companies annual reports, which enables to understand the corporate DB pension schemes in the UK. The limited empirical evidence on corporate DB schemes in the UK makes this thesis’s findings particularly valuable to the pension regulators, policymakers and the boards who can improve the management of DB schemes and prevent the schemes from being underfunded.
|Date of Award||13 May 2020|
|Supervisor||Ania Zalewska (Supervisor), Simone Giansante (Supervisor) & Paul Baker (Supervisor)|