Defined Benefit Pension Plans Research Articles

임원의 재무전문성이 퇴직연금 적립률에 미치는 영향

[Purpose] This study examines the impact of executives’ financial expertise on the funding level of defined benefit pension plans. On one hand, if executives with high financial expertise prefer to utilize available cash for more efficient investment options rather than locking it up in pension contributions, a negative relationship is expected. On the other hand, if executives with high financial expertise aim to increase the current funding level to alleviate future cash constraints or are concerned about negative evaluations in the capital market, a positive relationship is expected. The empirical analysis seeks to determine whether executives’ financial expertise lowers or raises the pension funding level. [Methodology] The sample for analysis consists of companies listed on the KOSPI and KOSDAQ from 2012 to 2022 that have adopted a defined benefit pension plan. Although the pension system was implemented in 2005, the initial period is excluded due to the low adoption rate of pension plans and the low funding ratio of defined benefit assets at the beginning of the system’s implementation. Executives’ financial expertise is measured by executives with keywords in their past careers such as finance, accounting, treasury, or CFO, and the pension funding level is measured by the ratio of pension assets to pension liabilities. [Findings] The empirical analysis shows that the higher the proportion of executives with financial expertise, the lower the pension funding level. This result can be interpreted as companies with executives having high financial expertise maintaining a lower funding level due to the high opportunity cost of investing available cash in pension contributions. Additionally, we find that the negative relationship between executives’ financial expertise and the pension funding level is driven by the subsample with a high funding level. [Implications] The results of this study provide evidence that for the pension system to act as a means of securing workers’ retirement income, an improvement in the return on pension assets is necessary.

Equilibrium strategies in a defined benefit pension plan game with regime switching

This paper studies the optimal management of an aggregated overfunded pension plan of defined benefit type as a stochastic differential game in a Markovian regime-switching environment. In this asymmetric two-player game, the worker participants act collectively as a single player that claims a share of the surplus, and the sponsoring firm acts as the player who cares about the investment of the surplus fund assets. We formulate the game model in two scenarios, and use the dynamic programming technique to derive the coupled Hamilton-Jacobi-Bellman equations in each scenario. Furthermore, we propose an efficient algorithm that incorporates a kind of quasi-Newton method and the Runge-Kutta scheme to obtain the equilibrium strategies. Finally, we employ a numerical example to verify our algorithm and analyze the impact of model parameters.

Defined benefit pension plan inhibit the emergence of cooperation in the public goods games

As a social welfare, pension insurance has provided a great assistance to retiree in maintaining their livelihoods. In order to reward the contributions made by cooperators, an additional pension income is provided to them. In this paper, we study a public goods game based on the pension system on population structure, in which only cooperators can purchase pension insurance and receive pension benefits upon meeting specified conditions. In the simulation, we demonstrate the evolution of cooperation frequency over time and investigate the influence of insurance premium, pension baseline, the number of defected neighbors of cooperators, and the enhancement factor on the cooperation frequency. Additionally, we examine the impact of the pension system on cooperative behavior in triangular and hexagonal networks. Our results suggest that in the public goods game on networked structure, the pension system not only fails to promote cooperation but actually inhibits it, even when cooperators do not have to pay any costs and can receive pensions when conditions are met.

The actuarial sources of the rise in unfunded liabilities in America's defined benefit plans in the 21st century

Abstract Despite a decade-long bull market between the financial crisis and the COVID-19 recession, state defined benefit pension plans had accrued more than $1.37 trillion in unfunded liabilities. However, little work has investigated the actuarial sources of these unfunded liabilities. This paper uses original data hand collected from publicly available financial reports between 2000 and 2020 for 145 state-administered pension plans to determine the sources of unfunded liabilities. The largest unfunded liability contributor is investment experiences (when actual investment returns do not match assumed returns). The second and third largest contributors are changes to actuarial assumptions and expected changes (or interest accruing on existing unfunded liabilities). Benefit experience and legislative changes, demographic experience, and explicit funding shortfalls account for relatively little of the growth in unfunded liabilities. Moreover, the specific sources of unfunded liabilities are heterogeneous over time and across plans.

The accounting for defined benefit pension plans in family firms

AbstractThis paper investigates the accounting for defined benefit pension plans in U.S. family firms. Relying on agency theory and the literature on defined benefit pension plans, we test whether the allocation of pension plan assets, the expected rate of return on pension plan assets and the contributions to defined benefit pension plans in family firms are significantly different from those in non‐family firms. Relying on a sample of U.S. firms over the period 2004–2018, we first document that family firms take more risk when allocating their pension plan assets relative to non‐family firms where they allocate a larger (smaller) percentage of pension plan assets in equity (debt) securities. We also show that family firms are more aggressive in setting the expected rate of return on pension plan assets than non‐family firms. However, family firms’ contributions to defined benefit pension plans are comparable to those of non‐family firms. Our findings hold after controlling for the endogeneity in family firms. These findings are important since they provide first hand empirical evidence on the accounting for defined benefit pension plans in family firms. They further shed light over pension plans that serve as a key tool to attract and retain executive talents and make up a significant portion of firms balance’ sheets.

De-risking pension plans: the impact on firm value from lump-sum buyouts

Firms have attempted to de-risk their pension obligations by offering its pension beneficiaries a lump-sum distribution instead of the guaranteed payments to be paid to retirees in a defined benefit pension plan. We examine the stock market reaction to the announcement of these offerings using event study methodologies. We find a statistically significant positive cumulative abnormal returns for the 20-day period prior to the event, the 20-day period after the event, and for the entire 41-day event period surrounding the announcement. We also find that the cumulative abnormal returns are higher the more liabilities a firm has and increases with the level of funding of the pension plan. Our results contribute to the literature on pensions by finding that firms that buy out their pensioners’ defined benefit payments via a lump-sum distribution experience an increase in firm value. There is a significant amount of analysis of such buyouts in the literature and in the press, but our results are the first to examine and document the increase in value derived from such pension changes. We also more fully develop the motivations for such events from a cost/benefit perspective.

Readability of Pension Narrative Disclosures, Pension Regulatory Changes, and Corporate Credit Risk

We examine, using corporate bond yield spreads, whether and how the readability of pension narrative disclosures is associated with corporate credit risk. The empirical results show that lower readability of pension narrative disclosures is associated with higher bond yield spreads. This association is driven by theoretical mechanisms, including incomplete information, asset value volatility, and financial leverage. The implementation of SFAS No. 132R-1 and the Pension Protection Act (regulatory mechanisms) has strengthened this association. We also consider two potential mechanisms that weaken the association between the readability of pension narrative disclosures and bond yield spreads: bond seniority and collateralization and shorter duration of debt to pension liability. Furthermore, our results show that pension plan size strengthens this association, whereas the funded status, actual return on pension assets, and equity allocation of pension assets weaken this association. Lastly, the results still hold when considering endogeneity issues, controlling for the tones and the length of pension narrative disclosure, employing difference-in-differences analysis, and examining firms with defined-benefit pension plans only or those with newly issued bond observations.

Optimal management of DB pension fund under both underfunded and overfunded cases

This paper investigates the optimal management of an aggregated defined benefit pension plan in a stochastic environment. The interest rate follows the Ornstein-Uhlenbeck model, the benefits follow the geometric Brownian motion while the contribution rate is determined by the spread method of fund amortization. The pension manager invests in the financial market with three assets: cash, a zero-coupon bond and a stock. Regardless of the initial status of the plan, we suppose that the pension fund may become underfunded or overfunded in the planning horizon. The optimization goal of the manager is to maximize the expected utility in the overfunded region minus the weighted solvency risk in the underfunded region. By introducing an auxiliary process and related equivalent optimization problems and using the martingale method, the optimal wealth process, optimal portfolio and efficient frontier are obtained under four cases (high tolerance towards solvency risk, low tolerance towards solvency risk, a specific lower bound, and high lower bound). Moreover, we also obtain the probabilities that the optimal terminal wealth falls in the overfunded and underfunded regions. At last, we present numerical analyzes to illustrate the manager's economic behaviors.

Do Managers Change Pension Plan Assumptions to Meet/Exceed Earnings Threshold? Korean Evidence

This study examines whether managers are likely to exercise discretion in determining pension plan actuarial assumptions to meet or exceed earnings targets. According to current accounting standards, managers can exercise broad discretion in setting actuarial assumptions under a defined benefit (DB) pension plan. Existing literature documents that managers can manage earnings upward by manipulating pension plan assumptions. Based on sample firms with DB pension plans from 2011 to 2018, our results reveal the followings. First, managers tend to manipulate pension assumptions optimistically when the unmanaged earnings miss the targets. Second, investors do not recognize the effect of changing assumptions on reported earnings and thus react favorably to the overstated earnings. Third, manipulating firms under-perform in the long run compared to the control group despite favorable short-term performance, which suggests accrual reversal and managerial attribute effects.

The Shifting Funding Status of Corporate Defined-Benefit Pension Plans

In recent history, corporate defined-benefit pension plans have remained underfunded; however, the economic instability generated by the COVID-19 pandemic prompted the enactment of two massive pieces of federal legislation, both of which included provisions that affected a significant rise in the discount rate utilized to calculate the pension liability. This study provides a detailed comparative analysis of pension funding metrics from 2020 to 2021 for half of the Milliman 100 Companies. Taking into consideration the continuing trend of corporations to shift their defined-benefit plans into defined-contribution plans, the study examines half-active and half-frozen defined-benefit plans. Results indicate that these large corporate defined-benefit pension plans have seen their decades-long underfunded status transmuted into either a significantly less underfunded status or, more often, an overfunded status. Although such results are encouraging in the short-term, economic instability continues to threaten the corporate pension system, and defined-contribution plans may place employee retirement funds at greater risk.

Corporate Pension Funding Levels, Firm Performance, and Dividend Payout Ratios

This study employs a large sample of defined-benefit pension plans sponsored by publicly traded US corporations over the period 1998–2016, and it explores the impact of the level of pension funding on firm performance and dividend payout policy. Using panel regression analysis, the study finds evidence of significant positive association between the level of pension funding and both firm performance and dividend payout. The results have a number of important implications that should be cause for concern for policymakers and a wide range of stakeholders, including investors, pensioners, employees, and managers.

A defined benefit pension plan game with Brownian and Poisson jumps uncertainty

In this paper, we study the optimal management of an aggregated pension fund of defined benefit type by means of a differential game with two players, the firm and the participants. We assume that the fund wealth is greater than the actuarial liability and then the manager builds a pension fund surplus. In order to contemplate sudden changes in the financial market, the surplus can be invested in a portfolio with a bond and several risky assets where the uncertainty comes from Brownian motions and Poisson processes. The aim of the participants is to maximize a utility of the extra benefits. The game is analyzed in three scenarios. In the first, the aim of the firm is to maximize a utility of the fund surplus, in the second, to minimize the probability that the fund surplus reaches a low level, and in the third, to minimize the expected time of reaching a benchmark surplus. An infinite horizon is considered, and the game is solved by means of the dynamic programming approach. The influence of the jumps of the financial market on the Nash equilibrium strategies and the fund surplus is studied by means of a numerical illustration.

AN EXAMINATION OF THE RELATIONSHIP BETWEEN THE FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS AND THE FINANCIAL CONDITION OF SPONSORING ORGANIZATIONS –PUBLIC VS PRIVATE SECTOR

Defined benefit pension plans are a bedrock of the U.S. economy providing guaranteed payment streams at preestablished amounts. Results suggest public plans, sponsored by State and Local governments, and private plans, sponsored by public corporations, are unfunded. State plans were found to have the largest pension and unfunded pension liabilities. Examination of relationships between unfunded pension liabilities and fiscal or financial stability of sponsoring organizations suggests unfunded State pension plans are more likely to be sponsored by financially struggling sponsors measured by general obligation bond ratings. Local governments and Corporations with unfunded pension plans are less likely to be struggling financially. Fiscal distress of Local governments was measured by survival analysis. Corporation financial distress was quantified by a model designed to predict bankruptcy. Financially stable organizations failing to fund pension plans, in this case local governments and corporations, suggests a lack of social responsibility.

Practical Applications of Maximizing Capital Efficiency in US Defined Benefit Pension Plan Immunizing Portfolio Construction Using Derivatives and a Power Law Relationship

In <b><i>Maximizing Capital Efficiency in US Defined Benefit Pension Plan Immunizing Portfolio Construction Using Derivatives and a Power Law Relationship</i></b>, from the April 2022 issue of <b><i>The Journal of Portfolio Management</i></b>, <b>Scott McDermott</b> of <b>Goldman Sachs Asset Management</b> explores the challenges of asset-liability risk management for the portfolios of defined-benefit pension plans. He first divides a plan’s portfolio into two components: one allocated to managing asset-liability matching (an “immunizing portfolio” or “IP”) and a second allocated to outperform the plan’s liabilities over time (a “growth portfolio” or “GP”). McDermott argues that an IP should be managed dynamically, to maximize capital efficiency, and that, when capital is scarce, managing interest rate risk takes priority over managing credit risk. However, the proportion of capital used for managing credit risk should increase as a plan’s funding status improves. The author proposes a power law relationship between the hedge ratios for interest rate risk and credit risk. He recommends using interest rate and other derivatives to maximize the efficiency of the strategy. The author thinks all managers should ask the following question: Which is riskier, interest rate or credit spread risk? Which has the most volatility, Treasury yields or corporate spreads? Which should we focus on hedging first, and how should we make the trade-off? His research provides fund managers with an approach to answer these questions and develop a more efficient hedging program.

Evaluating the efficiency of defined benefit pension plans in a developing market

PurposeThe cost-to-asset ratio is a vital efficiency ratio for any financial institution, as it measures its operating expenses to its asset base. This study uses this ratio to evaluate the efficiency of defined benefit pension plans (DBPPs) in the Republic of Congo using financial and macroeconomic indicators.Design/methodology/approachUnder the financial indicator, the authors apply vector autoregression (VAR) to a dataset covering 120 months from 2011 to 2020. In addition, the authors use 12 years of data from 2009 to 2020 and the random effects model under macroeconomic indicators.FindingsAssets and costs together Granger cause the efficiency of the DBPP. However, there is no Granger causality from the combination of assets and costs on the DB public and industry PP efficiencies. The random effects model results show that macroconnect level variables significantly lower the cost-to-asset ratio, thereby improving the PP's efficiency. Macrodisconnect level variables significantly increase the cost-to-asset ratio, thereby deteriorating PP efficiency.Research limitations/implicationsThe study is limited to a developing economy in sub-Saharan Africa, which may hinder the generalization of the results. Future studies could use panel samples from sub-Saharan Africa so that inferences could be drawn for the continent and comparisons made with others.Originality/valueTo the best of the authors knowledge, this study is the first in sub-Saharan Africa to assess the efficiency of DBPPs using financial and macroeconomic indicators.

How Much Do Teachers Value Compensation Deferred for Retirement? Evidence From Defined Contribution Rate Choices

How much do teachers value compensation deferred for retirement (CDR)? This question is important because the vast majority of public school teachers are covered by defined benefit pension plans that “backload” a large share of compensation to retirement relative to the compensation structure in the private sector, and there is scant evidence about whether pension structures are consistent with teacher preferences for current compensation versus CDR. This study examines a unique setting in Washington State, where teachers are enrolled in a hybrid pension system that has both defined benefit and defined contribution components. We exploit the fact that teachers have choices over their defined contribution rate to infer their revealed preferences for current versus CDR. We find that teachers on average contribute 7.23% of salary income toward retirement; 62% in fact elect to contribute more than the minimally required contribution of 5%. This suggests that teachers value CDR far more than suggested by prior evidence.

Mathematical Model for the Determination of Optimal Salary in Defined Benefit Pension Plan with Early Retirement, An Application of Smooth-Pasting Condition

The paper seeks to apply the mathematical model formulated by Adaji, et al (2015) to determine the optimal financial value of the retirement benefit Sf by applying Smooth Pasting condition. We examined the smooth pasting condition (tangency condition) along the optimal point at the boundary for an American put by considering the gradient, ∂V/∂S more closely and found that as long as V(S) coincides with the straight line, K-S gradient equals-1. We used Microsoft excel spread sheet facility to perform the individual computation for the last 25 years of service for University Senior Lecturers and the last 10 years of service for University Professors. The optimal salary Sf was determined by drawing a vertical line from the tangent perpendicularly to the horizontal axis (salary axis). We recommend the applictaion of this model to individuals as well as cooperate organisations so as maximise the expected retirement benefit. Early retirement alternate should be encouraged so that the teeming population of unemployed youths can take up the vacancies created as a result of early retirement.

Optimal consumption and portfolio selection for retirees with the guarantee of minimum welfare

The optimal consumption and portfolio selection for retirees who participate in a defined benefit pension plan are investigated. The retiree is unable to get full pension if exogenous shock exists. In this case, we assume that government provides the retiree with the guarantee of minimum welfare. Using the dynamic programming principle, we discuss the properties of optimal consumption and investment strategies. Numerical examples are provided to illustrate the effects of guarantee of minimum welfare and other factors on the optimal strategies. We find that the guarantee of minimum welfare has various effects on optimal consumption and investment for the retiree.

Perancangan Modul Persetujuan Otomatis dan Klasifikasi pada Sistem Persetujuan Lapor Diri Pensiun Menggunakan FSA

Retired Dana Pensiun Perkebunan Defined Benefit Pension Plan (PPMP) participants are required to certify annually that they still meet the criteria for being a valid pensioner. The retiree uses the Dapenbun online application to take a photo of himself and her ID card and wait for the data to be processed by the administrator. Pensioners who do not report will have their pension entitlements suspended. The number of retirees managed by the Plantation Pension Fund is over 216,000, and managers are overwhelmed with approval at the start of the re-data period. For this reason, authors design systems that can run automated approval and classification systems to facilitate data approval. Applying the FSA concept to this system reduces the processing of participant data as automation is applied to the first process of automatic termination of pensions for children aged 21 and over, second data with criteria for automatic approval. It will be faster. Categorizing data reduces approval errors and makes it easier for users to approve data.

Solvency and performance persistence of defined benefit private and public pension plans

PurposeThis study aims to examine the solvency and performance persistence of defined benefit private and public pension plans (DBPPs) in the Republic of Congo.Design/methodology/approachThe authors use the 2 × 2 contingency table approach and the time product ratio (TPR)-based cross-product ratio (CPR) on data covering ten years from 2011 to 2020, with variable funded ratios and excess returns, to determine the solvency and performance persistence of defined benefit pension plans.FindingsThe authors document a lack of solvency and performance persistence in DBPP funds. They conclude that the solvency and performance of DBPP funds are not repetitive. The previous year's private and public defined benefit pension funds’ results do not repeat in the current year. Hence, the current solvency and performance of defined benefit pension funds are not good predictors of future funds' solvency and performance.Originality/valueTo the best of the authors’ knowledge, this study is the first to combine solvency and performance to examine the persistence of defined benefit pension plans in sub-Saharan Africa.