Incentivising executives to pay into DB schemes better than penalising

Incentivising executives to fund their pension schemes is more likely to see defined benefit schemes survive, rather than penalising bosses once schemes have failed, academic research has revealed.

According to the research undertaken by Sun Yat-sen University, University of Exeter Business School and Lancaster University Management School, compelling bosses to pay into their staff defined benefit pension schemes before they pay out to shareholders would also help make DB more sustainable.

The universities highlighted recent plans announced by the government to make it a criminal offence for company bosses that are ‘wilful or reckless’ playing ‘fast and loose’ with their pension schemes. However, the research suggests that incentivising executives is better than punishing bosses once pension schemes had failed.

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 examined around 1,655 firms from 2003 to 2011, among which 277 made share buybacks and other windfall payouts. The authors found that companies use transitory cash to make pay outs to shareholders as opposed to funding pension benefits.

Therefore, despite welcoming the government’s plans, the academics suggested encouraging companies to fund DB schemes before making payouts to shareholders is an alternative solution to penalising bosses after the DB pension scheme has collapsed. They also believe that prison sentences up to seven 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 per cent, which partly justifies The Pensions Regulator’s concern that firms distribute cash that could be used to reduce pension deficits, the researchers noted.

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.”

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