De-risking strategies of defined benefit plans and economic outcome: empirical evidence from U.S. Firms

Abstract

ABSTRACT This paper examines the de-risking behaviour of defined benefit (DB) pension plans sponsored by U.S. firms. By analysing a range of strategies used in U.S. markets between 1994 and 2018, such as plan shifts, freezes, terminations, buyouts, buyins, and longevity hedges, we identify the key drivers and outcomes of pension de-risking. Our findings suggest that severe underfunding of pension plans is a major catalyst for de-risking, and firms facing a higher degree of financial distress are more likely to de-risk. Although de-risking varies across sectors, we find no significant evidence of improvements in firm operational performance or credit risk following de-risking. Additionally, de-risking decisions are influenced by the interest rate environment, becoming more likely when the projected long-term interest rates decline or when returns on risky assets are expected to increase.