July 13, 2008




            Free cash flows simply refer to revenues minus cash expenses plus nonrevenue cash receipts plus or minus cash changes in working capital minus capital expenditures (Priest and McLelland, 2007). The word 'free' in free cash flow refers to the idea that after the company funds cash expenses and the changes in receivables, inventories, and fixed assets required to generate the revenues, the remaining cash flow is 'free' to be used for whatever management decides is best for the company" (Priest and McLelland, 2007). Free cash flow can basically be derived from any liabilities that the company has. For instance, in the pension system of the company, free cash flow can be extracted in cases when an employee becomes unqualified for a pension scheme. Free cash flow can also be obtained in pension when the total pension expenses are lesser than the total budget allotted for the pension system. Priest and McLelland (2007) stated: "free cash flow is a specialized concept that allows us to determine the true amount of cash available for immediate, discretionary, strategic use by a business". This type of cash flow may perhaps have a significant impact on the company's pension system as mentioned earlier. This study will explore this issue and will try to identify the impact of free cash flow on the overall pension system of the company. The purpose of this study is to be able to identify the advantages and disadvantages of free cash flow, and the company can basically benefit from it by using it on their pension policies. It will also explore how much free cash flows the company can acquire from pension and how they are used.



This study will explore the impact of free cash flow on the pension system of the company respondent. Free cash flow can be achieved from anything the company has considerably saved. Free cash flows can be used in any investments other than current investments that company has. In other words, free cash flows might benefit the pension systems of the companies. Of course, this depends of what type of pension system the company has. There are three kinds of pension that the World Bank stated: Pillar 1; Pillar 2; and Pillar 3. Pillar 1 is the state Pay-As-You-Go (PAYG) scheme; Pillar 2 is State-Earnings-Related-Pension-Scheme; and Pillar 3 is the defined benefit (DB) schemes (Arthur, 2001). Barr and Diamond (2006) mentioned several others such as the defined contribution (DC), Fully Funded schemes and the Notional Defined Contribution (NDC). Among those, the UK followed the three pillars that the World Bank suggested: the PAYG; SERP; and DB. However, the SERP has been abolished lately and replaced with the newer S2P or State Second Pension (Arthur, 2001). Each of these pension systems have different approaches and may be affected differently by the free cash flow of the company.



            The following research questions will be explored in the study:

Ø      What are the advantages and disadvantages of free cash flow and its relationship with the pension system?

Ø      How does free cash flow affects the pension system of the company?

Ø      Is free cash flow being used by companies to improve their current pension systems?



            The aim of this paper is to identify the advantages and disadvantages of free cash flows and their impact to pension system. The study will try to achieve the following objectives:

Ø      To conduct a case study on a specific company in UK and research about how much free cash flow they get annually and identify how it impacts their pension system.

Ø      To be able to account the value of FCF and how it affects the distribution of cash in the pension system.


The research will be descriptive in nature. A descriptive research intends to present facts concerning the nature and status of a situation, as it exists at the time of the study (Creswell, 1994). It is also concerned with relationships and practices that exist, beliefs and processes that are ongoing, effects that are being felt, or trends that are developing. (Best, 1970) In addition, such approach tries to describe present conditions, events or systems based on the impressions or reactions of the respondents of the research (Creswell, 1994). Primary data specifically the company's annual report, the rate of FCF and the total budget for pension will be collected. Then an accounting computation will be conducted to identify the relationships between the two variables.



Arthur, T. (2001). UK Pension Policy: World Leader Turning Laggard? IEA Economic Affairs, Vol.1, pp.41-45


Barr, N. and Diamond, P. (2006). The Economics of Pension. Oxford Review of Economic Policy, Vol.22, No.1, pp.15-39


Creswell, J.W. 1994. Research design. Qualitative and quantitative approaches. Thousand Oaks, California: Sage.


Priest, W.W. and McLelland, L.H. (2007) Free Cash Flow and Shareholder Yield. Wiley: New York.








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