Defined Benefit Pension Plans Research Articles

Antecedents of and Outcomes after Finance Committee Use

We study why firms voluntarily create and use finance committees and whether firms realize benefits. Firms are more likely to have a finance committee when they have defined benefit pension plans, debt equity issuance, and active dividend payout. Capital expenditures, restructuring, material weaknesses in internal controls, and restatements are drivers of creating a finance committee. While we find a weak association between finance committee use and financial performance on average, we find that finance committees that are highly independent have better-performing investments. Finance committees contribute to lowering the cost of debt for firms with small audit committees.

Impact of Board Composition on Pension De‐risking Strategies

AbstractPension de‐risking strategies have been widely adopted by firms with defined‐benefit (DB) pension plans to reduce pension risk. This paper investigates the influence of board composition on pension de‐risking strategies within the UK, focusing particularly on three strategies: changes to pension asset allocations, switches from DB to defined‐contribution (DC) pension plans and pension buy‐ins and buy‐outs. Our findings suggest that firms with larger boards and more independent directors are less likely to invest their pension assets in equities. Survival analysis shows that firms with larger boards are slower to switch from DB to DC pension plans. This is consistent with stakeholder theory, in that firms with large boards or more independent directors are more likely to protect employees’ benefits when de‐risking their DB pension plans. However, firms with more female directors are faster to switch fully from DB to DC pension plans and slower to engage in pension buy‐in and buy‐out transactions. This suggests that female directors encourage fully switching DB pension plans, while they are concerned with the significant costs of pension buy‐in or buy‐out. This research provides clear evidence that pension de‐risking strategies are influenced by board composition. UK pension trustees play a key role in determining switches from DB to DC pension plans, mitigating the impact of independent directors.

Dow to freeze US pensions

Dow is freezing accruals to its two defined benefit pension plans at the end of 2023. The move affects current employees but not retirees or former employees vested in the pensions. Some 14,400 act...

Defined benefit pension de‐risking and corporate risk‐taking

AbstractU.S. corporate sponsors of defined benefit (DB) pension plans in recent years have been de‐risking by paying premiums to transfer their pension plan assets and liabilities to the balance sheets of third‐party insurers. The passage of the Moving Ahead for Progress in the 21st Century Act (MAP‐21) in 2012 provided the pension funding relief necessary to make de‐risking a mainstream corporate activity. This study provides the first empirical analysis of plan and firm factors that cause a firm to de‐risk its DB pension plans. We find a positive association between de‐risking and aggregate corporate risk‐taking. The results also show that de‐risking, on average, has a stronger effect on corporate financing policy than investment policy, leading to an increase in credit risk reflected in a firm's credit rating and cost of debt. Also, we present suggestive evidence that the reallocation of pension risk increases firm idiosyncratic risk and excess returns.

Impact of defaults on participation in state supplemental retirement savings plans

AbstractThis study examines the impact of the adoption of automatic enrollment provisions by the state of South Dakota for its supplemental retirement saving plan (SRP). In South Dakota, state and local government employees, including teachers, are covered by a defined benefit pension plan and by Social Security. Prior to the introduction of automatic enrollment, the proportion of newly hired employees who were contributing to the SRP was less than 5% in their first year of employment. After the introduction of automatic enrollment, over 90% of newly hired workers who were auto-enrolled were participating in the plan. Using a difference-in-difference approach we find that automatic enrollment changes differences in the participation rate by age, sex, and income. We also find that prior to the adoption of auto-enrollment, agencies that ultimately chose to implement this policy had higher participation rates compared to those that did not adopt auto-enrollment.

Smanjenje značaja penzijskih planova sa definisanim penzijskim nadoknadama u razvijenim zemljama

Defined benefit pension plans have played an important role in pension sectors of developed countries in North America, Great Britain and Western Europe for several decades. However, with the beginning of the 21st century, altered demographic trends and global financial market fluctuations have significantly disrupted the financial position of defined benefit pension plans. The aim of this paper is to examine the long-term movement of indicators of the importance of defined benefit pension plans in the pension systems of four developed countries: the United States, Canada, the Netherlands and Great Britain. In these countries defined benefit pension plans still have an important role. The analysis shows that the number of occupational defined benefit pension plans in private sector in the observed countries is declining, along with the continuously decreasing number of participants and increasing problems in achieving a sustainable financial position in the long run.

Retirees in Profile: Evaluating Five Distinct Lifestyles in Retirement

Retirees in Profile: Evaluating Five Distinct Lifestyles in Retirement

Corporate Social Responsibility, Pension Assumptions, and Risky Asset Allocations in Defined Benefit Pension Plans

I explore the role of corporate social responsibility (CSR) in mitigating managers' opportunistic behavior related to defined benefit (DB) pension plan management. Strong CSR firms tend to engage less in earnings manipulation associated with executive option granting and CFO's pay sensitivity to the stock value (Delta) through the assumed long-term rate of returns on pension assets. Furthermore, strong CSR firms are less likely to manipulate the pension discount rate in response to a change in the pension funding gap. I also investigate whether CSR influences firms' decision to make risky investments with pension assets. OLS analysis indicates that a standard deviation increase in the Material CSR score is associated with 0.063 (1.93) percentage points decrease in assumed returns (equity allocation) in pension plans. Using the BP Deepwater Horizon oil spill event as an exogenous shock, I provide supporting evidence for the causal link between firms' CSR performance and the pension policies.

Governance and corporate control in the United States

This paper provides an overview of business entities in the United States. We analyze current trends in the ownership structures of U.S. firms, diversity and inclusion, mergers and acquisitions, minority shareholder rights protections, and review the literature related to corporate ownership and financial performance. With the shift in the U.S. from defined benefit pension plans to defined contribution plans and a desire for increased corporate governance, we observe a significant increase in the financial assets under management by large institutional investors. It is believed these large institutional investors can have a significant impact on the governance, decision-making, and performance of the U.S. publicly traded firms. We observe an increasing trend in foreign indirect investment in the U.S. from countries in Europe, Asia and the Pacific Rim, North and South America, the Middle East, and Africa. Additionally, increased compensation of publicly traded firms’ top executives is shown, which has resulted in an increased disparity between the compensation of top management teams and the firms’ hourly employees. Lastly, we expect the suggested bias against women and other minorities, as evidenced here, will be lessened in the future and should result in improved financial performance for firms

Biased Actuarial Assumptions and SFAS 132R: The Not-for-Profit Response

ABSTRACT In 2003, the FASB issued an accounting standard (132R) requiring defined-benefit pension plan sponsors to disclose in the notes the asset allocations of their sponsored pension plans. A motivation for this requirement was to help users evaluate a plan's expected rate of return (ERR) assumption which is supposed to be determined by the allocation of plan assets to risky investments. All else being equal, the higher the assumption, the lower the pension expense and the higher the reported profits of plan sponsors. We hypothesize that not-for-profits used the ERR to inflate their earnings by reducing pension expenses. Using a dataset of audited financial statements and a difference-in-differences design, we find that not-for-profits significantly decreased their ERRs post-SFAS 132R. The results suggest that opportunistic actuarial assumptions by not-for-profits were reduced following the implementation of SFAS 132R. JEL Classifications: J32; L31; L38; M41.

The Effect of Corporate Social Responsibility on Hard-Freezing of Pension Plan and Firm Performance

In recent years, there has been a dramatic increase in the hard-freezing of defined benefit pension plans. Although cost savings associated with a pension freeze are expected to lead to improved future performance, prior studies do not provide conclusive empirical evidence to support enhanced firm performances following pension freezes. In this study, we examine how firms’ commitment to corporate social responsibility (CSR), especially their commitment to employee relations, affects their decision to freeze pension plans, and how firms’ CSR activities affect the association between the pension freeze and their post-freeze performance. First, we find no evidence that firms with a high overall CSR score are less likely to freeze their pension plans, but we find supporting evidence that firms with a high CSR score on the employee relation aspect are less likely to freeze their pension plans. In addition, we find that the pension freeze has a positive impact on the firm’s future performance, as measured by the return on assets, for the firms with high CSR scores.

The role of CEOs in the sustainability of defined benefit pension plans

ABSTRACTThe future of defined benefit (DB) pensions is a hotly debated topic in reward management. Drawing on agency and managerial power theories, the conditions under which CEOs can affect their sustainability have been examined. We show that when the CEO is a member of the same DB plan as their employees or when the CEO is both a member and a trustee of the plan, this affects the agency and power dynamics increasing the likelihood of these plans being retained. To address endogeneity concerns, we mimic randomisation using propensity score matching and the results continue to hold. Using the introduction of pension tax penalties as an exogenous shock on CEO self‐interest, we find that it affects the propensity of DB plan closures. The study highlights the key role that CEO incentives play on pension–provision decisions and indicates how HR practitioners/regulators can harness CEO self‐interest to safeguard the sustainability of DB pension plans.

A conceptual framework for business accounting of social capital elements

Subject. This article deals with the issues of reflection of social capital in integrated reporting and methodological support for the processes of its formation in the business accounting system. Objectives. The article aims to prove the need for this reflection and describe an approach to determining the content of new accounting methods. To achieve this goal, it is advisable to use the theory of economic agreements. Methods. For the study, we used the methods of analysis, considering the institutional economics, integrated reporting, and the Framework for the Preparation and Presentation of Financial Statements. Results. The article substantiates the expediency of forming defined-benefit pension plans for entrepreneurs, employees and the State, and it emphasizes that the right of the employee to receive a fixed amount of money after the one's employment activity has ended, should be reflected in the defined-benefit schemes. Conclusions. The proposed social capital business accounting model fits well into the fundamental concept of integrated reporting, and it can be an integral part of an integrated report. Information on social capital is necessary for a balanced social security system involving commercial organizations, employees, and the State.

New Financial Instruments for Managing Longevity Risk

Reduced returns and longevity risk are making it challenging for employers to offer defined benefit pensions. In countries with large defined benefit pension plan sectors, sponsors are transferring these obligations, and the associated investment and longevity risk, to life (re)insurers via buy-outs, buy-ins, and longevity swaps. Nevertheless, to date, there has been no successful longevity bond issuance, although there have been several false starts. This contrasts with the active market for catastrophe bonds that transfer risk associated with catastrophic events from (re)insurers to capital markets. This paper reviews catastrophe bond and other insurance risk transfer market developments, to identify the factors and design features that have resulted in success and failure. Conclusions are informed by an extensive literature review and quantitative survey, plus discussions with market participants including public policy makers. We conclude with suggestions for product design features and public policies that might kick start vibrant longevity bond markets.

Time consistent pension funding in a defined benefit pension plan with non-constant discounting

We consider the time consistent management of a defined benefit stochastic pension plan where the participants have different rates of time preference and the fund manager collects this heterogeneity when discounting the future. The main objective is to select the amortization rate and the investment strategy minimizing both the contribution rate risk and the solvency risk. The problem is formulated as a stochastic control problem with non-constant rate of discount and is solved analytically by means of the dynamic programming approach and the technical interest rate is selected in order to keep stable the fund evolution within prescribed targets. A numerical illustration shows a comparative of the stability of the fund assets and the rate of contribution for a convex combination of exponential functions as discount function and for the constant discount case.

Pension Deficits and Corporate Financial Policy: Does Accounting Transparency Matter?

We study changes in financial policies following a regulatory shock to the accounting transparency of defined benefit pension plans. We estimate the hidden pension deficits of French companies subject to mandatory IAS 19 adoption in 2005 using disclosures of early adopters of IAS 19. We find that financially risky companies reporting unexpectedly high pension deficits on first-time IAS 19 adoption subsequently reduce leverage and incur higher cost of debt. Our results suggest that in the absence of transparency the credit market anticipates off-balance sheet pension deficits. However, the introduction of the more transparent IAS 19 regime allows the credit market to correct estimation errors. Our study is one of the first to show that the greater transparency offered by IFRS has negative economic consequences for some companies.

Determinants of Capital Adequacy Ratio for Pension Funds: A Case Study in Indonesia

The study aims to identify factors that influence adequacy ratio of fund (RKD) of the Defined Benefit Pension Plan (PPMP) Pension Fund for 2009-2018 period such as Return on Asset (ROA), Cash Conversion Rate (CCR), Central Board Revenue (CBR), Operating Expense Ratio (OER), Investment Expense Ratio (IER), and investment. The data analysis was common effect panel data regression method and the samples were twenty pension funds. The results showed that ROA, CCR, and investment have a significant and positive influence towards RKD, CBR and OER have a significant and negative influence towards RKD. IER did not have significant influence towards RKD.

Estimating the effect of active management and private equity for defined benefit pension funds

We conduct a returns-based Sharpe (1988, 1992) style analysis of U.S. corporate defined benefit pension plans. The returns for corporate pension funds are reported only once per year, limiting the degrees of freedom for a returns-based style analysis. To address this problem, we introduce a “Search” method that systematically tests all possible combinations of a limited number of factors (market indices) to find the set with the highest explanatory power of historical returns. We find that pension funds exhibit significant exposure to private equity, much more so then balanced funds. We provide a new approach to measuring the relative contributions of policy and active management by using squared partial correlation coefficients to control for market movements. We find that pension funds show more active management compared to balanced funds.

Real Estate and Alternative Asset Allocations of U.S. Firms' Defined Benefit Pension Plans

This study examines the role of real estate and alternative assets in the investment portfolio of defined benefit (DB) pension plans offered by U.S. firms for the period 2002 to 201'3 These plans provide a unique reflection of the confluence of regulatory, accounting, and economic changes that have recently taken plance. Results indicate a quarter of our sample plans invest in real estate while more than half invest in alternative assets. Logistic and panel data regression analyses generally indicate that pension plan size, contribution levels, and funding status are significant in explaining the likelihood of and the variance in the allocation of plan assets to real estate and alternative investments.

Unclaimed Defined Benefit Pensions Can Help COVID-19 Economic Recovery

ABSTRACT The COVID-19 economic crisis makes it vitally important that workers who earned defined benefit pensions receive them at retirement. Unfortunately, billions of dollars that could help cushion the financial shock are sitting unclaimed, because the people who they belong to cannot locate the company responsible for paying them. As defined benefit pension plans have been terminated, merged and moved over the years, large numbers of deferred vested participants have not been notified about their benefits. The widespread and growing practice of insurance company pension buy-outs can be especially problematic for participants without notice. Broader use of electronic disclosures for pensions also threatens to make the situation worse. In the wake of COVID-19, policy makers should take steps to ensure that pension benefits are part of the economic recovery.