Companies made to pay into pension schemes before shareholders would help keep pension schemes afloat

Incentivising executives to fund the pension schemes is more likely to see the schemes survive, as opposed to seeking to punish bosses once pension schemes had failed.

Amber Rudd, the Secretary of State for Work and Pensions announced plans to introduce a new criminal offence in order to punish ‘wilful or reckless behaviour’ in relation to pension schemes.

A study carried out by Meng He from Sun Yat-sen University, Paraskevi Vicky Kiosse from Exeter University and Steven Young from Lancaster University Management School examines around 1,655 firms from 2003 to 2011, among which 277 made share buybacks and other windfall payouts. The authors find that companies use transitory cash to make payouts to shareholders as opposed to funding pension benefits.

Even though the Government’s initiative is a welcome development, Meng He, Research Assistant Professor at SYSU, Paraskevi Vicky Kiosse, Associate Professor of Accounting at Exeter University Business School and Steven Young, Professor of Accounting at Lancaster University Management School suggest that encouraging companies to fund defined benefit schemes before making payouts to shareholders is an alternative solution to penalising bosses after the defined benefit pension scheme has collapsed. Prison sentence up to 7 years for company bosses will probably be difficult to enforce and the benefits for members of the scheme are unclear.

Results of their study also show that for firms without well-funded plans the probability of share buybacks and other windfall payouts increases by 62%, which partly justifies the Pensions Regulator’s concern that firms distribute cash that could be used to reduce pension deficits.

He, Kiosse and Young added: “The implication of our findings is that trustees, actuaries and The Pensions Regulator should scrutinise the existence of transitory excess cash in sponsors’ accounts in light of mounting defined benefit deficits over a number of years. Forcing companies to use excess cash to fund defined benefit schemes is more likely to ensure the sustainability of the pension schemes and the welfare of employees in the long-run.”