Pension Funding Constraints and Corporate Expenditures


  • This paper has benefited from seminar presentations at the University of Exeter and University of Bath, and we are grateful for comments from David Blake, George Bulkley, Paul Draper, Andy Snell, David Webb and two anonymous referees. Errors remain the responsibility of the authors. We are grateful to Helen Cochrane funded by CMPO, Bristol for collecting some of the data used in this study.


This paper examines the impact of a company's pension contributions (PCs) 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 PCs 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 PCs.