The Influence of PBGC Insurance on Pension Fund Finances

Abstract

Abstract It is sometimes argued that firms sponsoring defined benefit pensions are led to take higher risks because pension insurance premiums and funding requirements do not reflect the riskiness of the pension plan portfolio or sponsor bankruptcy risk. This perspective is tested by linking company data on expected default probabilities with newly-available information on pension plan assets. It is shown that moral hazard induced by the current pension insurance environment has influenced corporate pension plan sponsor funding outcomes, even controlling for cash availability. There is no evidence that the share of plan assets invested in equities is related to firm bankruptcy risk or the plan’s contingent claims on the pension insurance entity.