The Determinants of Freezing Defined-Benefit Pension Schemes in the United Kingdom and its Effects on Executive Compensation and Financial Management

Abstract

The UK had the World’s second largest amount in pension assets, at USD 3.6 trillion according to an OECD report at the end of 2019. Occupational pension schemes consist mainly of Defined Benefit (DB) schemes and Defined Contribution (DC) schemes to pay schemes’ members retirement incomes. However, the funding positions for the DB pensions have been declining since the 2000s. With more stringent legislation to safeguard scheme members’ funds, the sponsoring employers are under greater stress in managing DB plans for their employees and a shift towards DC plans started a few decades ago. The market downturn in 2008 resulted in deficits in pension schemes and accelerated the shift in occupational pension schemes. This thesis explores the determining factors for freezing DB plans and the effects of decision making on senior management pay, the firm’s investment activities and dividend payments in the UK.

For examining the driving factors on pension plan decisions, a unique hand-collected dataset of pension information was obtained from the published annual reports from company websites. Additionally, company financial information was downloaded from FAME, DataStream and Thomson One and senior management remuneration was obtained from BoardEx. I adopted firm-year level of UK data during the period between 2009 and 2018 for the analysis.

The thesis finds some evidence that pension plan asset is the key factor for determining the freezing of the DB plans and companies tend to close their DB schemes in a good economic state. After investigating the internal decision making on pension freezes, my empirical results indicate that firms tend to pay top management higher salaries in compensation for moving towards offering the different pension policy in the company. My findings also suggest that the positive relationship between executive pay, and shift of retirement pension plan policy is more pronounced in firms with more severe agency problems. I also find evidence that companies prefer increasing the dividend ratio after a shift to occupational pension plans and these firms devote less resources to investment activities compared with firms that keep DB schemed open to all employees.

The thesis contributes to existing literature on occupational pension policy. Application of a unique new dataset in the UK financial market also contributes to the literature on incentives. This study may also help firm’s remuneration committee to deal with their pension policy regarding of decision making on corporate pension plans in the UK. In addition, my results provide evidence that those firms changing their pension plans invest less, both short-term and long-term. These findings enrich the literature on the analysis of firm investment activities following the movement of pension plans.

Date of Award	29 Mar 2023
Original language	English
Awarding Institution	University of Bath
Supervisor	David Newton (Supervisor) & Weixi Liu (Supervisor)