by
Donal McKillop
Queen’s University Management School
and
Michael Pogue
University of Ulster
This report has two primary objectives. First, a review of the composition of pension funds, incidence of pension scheme deficits and the impact of pension risk, variously measured, on equity risk and debt ratings. The latter component is based on an econometric analysis of a panel data set of FTSE100 companies for the period 2002 to 2006. The primary objective of the econometric component is to ascertain whether the respective debt and equity risk metrics reflect pension plan risk. If they do, this would suggest that, with respect to pension plan funding debt and equity, markets are informationally efficient. On the other hand, if pension risk is not accurately reflected, markets may be viewed as informationally inefficient, resulting in the underestimation of risk and the resultant overvaluation of firms.
To undertake an econometric analysis in isolation runs the risk of failing to encapsulate a holistic understanding of the complexities of the funding of defined-benefit pension schemes. A second primary objective is therefore to provide a systematic analysis of issues surrounding the pension debate in the UK, within which the econometric analysis is eventually located. This overview is achieved through a review of current literature and, importantly, a series of semi-structured interviews with identified key stakeholders, including scheme and consulting actuaries, lay and independent trustees, finance directors and academics. The interviews focus upon stakeholder attitudes to accounting disclosure, the actuarial input and scheme governance, along with reactions to continuing developments in pensions legislation. Information garnered from these interviews, integrated with the conclusions from the econometric analysis, then forms the basis for a number of policy recommendations and directions for further research.