Defined Benefit Pension Research Articles

Contrasting the information demands of equity- and debt-holders: Evidence from pension liabilities

In the setting of defined-benefit pension liabilities, we hypothesize that equity and debt investors value these liabilities differently. As expected, we find that investors' valuations of equity more closely align with a going concern perspective that emphasizes the long-term funding needs of pension plans. In contrast, as expected, we find that investors' pricing of short-term and unsecured debt more closely aligns with a settlement perspective that emphasizes pension termination costs. For both equity and debt securities, the settlement (going concern) perspective dominates for short-duration (long-duration) pensions. Overall, our evidence suggests that equity and debt investors perceive complex liabilities in predictably different ways that are consistent with their differing information demands, which in turn vary with the characteristics of the obligation.

The Effects of the Tax Cuts and Jobs Act of 2017 on Defined Benefit Pension Contributions*

ABSTRACTThis study examines the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on corporate defined benefit pension contributions. The TCJA decreases the corporate tax rate from 35 percent in 2017 to 21 percent in 2018 and thereafter. This change incentivizes firms to increase 2017 pension contributions to take advantage of tax deductions at a higher rate. Consistent with this incentive, we find firms increase defined benefit pension contributions by an average of 25 to 31 percent in 2017 compared with earlier years. We also find that taxpaying firms are the primary contributors. Further, taxpaying firms with high levels of pension‐related deferred tax assets contribute over three times as much as taxpaying firms with low levels of pension‐related deferred tax assets. We also find firms that increase pension contributions in 2017 reduce 2018 contributions, consistent with intertemporal income shifting rather than a permanent change in pension funding strategy.

Changes to Household Retirement Savings Since 1989

This report uses two new data sources to provide insights on the evolution of retirement savings over the past three decades and how future retirees may fare. First, the Federal Reserve’s Survey of Consumer Finances and Distributional Financial Accounts (DFA) provide estimates of both household savings in retirement accounts and any benefits households accrued under a traditionally defined benefit pension. The DFA data show that, from 1989 through 2016, household retirement savings increased for every age, income, race, or educational group. This is true whether retirement savings are measured in inflation-adjusted dollars or as the ratio of retirement savings to their annual earnings. Second, I present previously unpublished projections from the Social Security Administration’s Model of Income in the Near Term (MINT). The MINT model projects that future retirees will have retirement incomes as a percentage of pre-retirement earnings similar to those of current retirees.

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.

Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical application we apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.

Defined benefit pension policies and social responsibility performance: do socially responsible firms walk the talk?

PurposeThis study aims to examine whether socially responsible firms have well-funded employee pension programs and whether corporate social responsibility (CSR) performance is associated with management discretionary choice of pension accounting assumptions.Design/methodology/approachThe current study examines the impact of CSR performance on two measures of pension funding and two pension accounting assumptions using regression analysis. This study uses a panel data of 13,099 firms-years across 1,428 US firms from 1992 to 2015.FindingsFirms with higher CSR scores report higher pension net assets and are less likely to have underfunded pension than their counterparts. These firms also adopt more responsible (conservative) pension accounting assumptions (i.e. lower discount rate and a higher rate of compensation increase) to estimate pension benefit obligations. Results are stronger for firms that operate in the materials and industrial sectors and for the post-2000 period when underfunded pension has become more prevalent. Firms with higher CSR scores are also less likely to have a pension freeze.Originality/valueThis study examines the signaling role of CSR by using the signaling theory to explain how senders view the signaling process as a channel to build their reputation and the correspondent inference theory to explain how receivers process and assess the signal. It provides evidence that the signal provided by CSR score is reliable in assessing firms’ commitment to non-investing stakeholders, such as employees, providing valuable information for potential employees making career decisions and for managers considering employee pension as part of corporate strategies to attract high quality workforce. This study provides inputs for public accountants providing assurance services that CSR performance has a significant impact on management reporting choices. This study also provides evidence that CSR could be considered a private provision of public goods that internalize the negative externality of the prevalent underfunded pension phenomenon.

An Analysis of Connecticut's Public Employee Retirement Plans

The state of Connecticut runs six defined benefit pension funds for its employees, which in the aggregate are among the most poorly funded retirement plans in the country and place increasing fiscal burdens on the state budget. We use a computer model to simulate the finances of these plans, demonstrating how sensitive the plans’ funded ratios and unfunded liabilities are to changes in assumed future investment returns. Future investment returns that are well within the reasonable distribution of outcomes could produce substantially greater unfunded liabilities than even those that currently are reported. This exercise demonstrates the need for greater attention to uncertain investment returns in government analyses and financial disclosures regarding public employee pensions plans.

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.

Do Socially Responsible Firms Walk the Talk? CSR Performance and Defined Benefit Pension Policies

This study examines whether socially responsible firms are more likely to have well-funded employee pension programs. It also examines the relationship between corporate social responsibility (CSR) performance and management discretionary choice of pension accounting assumptions. Signaling theory suggests that managers use CSR performance as a credible signal of firms’ commitment to engage in socially responsible business practices to the stakeholder. Correspondent inference theory suggests that the stakeholder attributes CSR performance to firms’ reputation of serving the interests of stakeholder. To protect their reputation, firms must take actions that are consistent with the signal they send via firms’ CSR commitment. Maintaining responsible employee pension policies is a socially responsible action because the defined benefit plan is voluntary and employers have to bear greater investment risk and cost associated with the plan than the alternative retirement plan. Using panel data of 13,099 firms-years across 1,428 U.S. firms from 1992 to 2015, this study finds that firms with higher CSR scores are less likely to have underfunded pension and they report higher pension net assets than their counterparts. More socially responsible firms also adopt more responsible (i.e., conservative) pension accounting assumptions (discount rate and rate of compensation increase) to compute estimated pension benefit obligations.

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.

Employment and Earnings of African Americans Fifty Years After: Progress?

Employment and Earnings of African Americans Fifty Years After: Progress?

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.

Room to Thrive: Why Principles-based Standards Make Sense for Regulating Contingent Pension Plans

As membership in traditional defined-benefit pension plans declines, plans in which benefits are contingent on the financial status of the plan are becoming more common. Rather than placing all the risk on sponsors to deliver guaranteed benefits to members, these contingent pension plans require members to take on at least some of the risk that benefits may or may not meet expectations. This E-Brief focuses on two types of contingent plans, target-benefit plans and multi- employer pension plans. These plans offer a different promise than traditional defined-benefit plans and the contract with plan members is different. This needs to be reflected in how they are regulated. Regulators should adopt a principles-based approach to financing-related standards, while using a rules-based approach for aspects such as governance and member communication. Principles-based regulations focus on desired outcomes rather than processes. Most contingent plans have members materially involved in the running of the plan, involved in making all key decisions, which makes principles-based regulations particularly well fitted. Plan governors would have more flexibility in how they manage the financing risks, rather than having to comply with generic rules that attempt to work on a universal basis. The streamlining of rules and an emphasis on objectives promote compliance, and enhance the ability of regulations to achieve their desired outcomes.

Cost saving and the freezing of corporate pension plans

Companies that freeze defined benefit pension plans save the equivalent of 13.5% of the long-horizon payroll of current employees. Furthermore, firms with higher prospective accruals are more likely to freeze their plans. Cost savings would not be possible in a benchmark model in which i) all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. We find evidence consistent both with firms' reneging on implicit contracts that would have provided workers with high pension accruals later in their careers and with shifts in employee valuation of different forms of retirement benefits.

Cost Shifting and the Freezing of Corporate Pension Plans

Abstract Companies that freeze defined benefit pension plans save the equivalent of 13.5% of the long-horizon payroll of current employees. Furthermore, firms with higher prospective accruals are more likely to freeze their plans. Cost savings would not be possible in a benchmark model in which i) all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. We find evidence consistent both with firms' reneging on implicit contracts that would have provided workers with high pension accruals later in their careers and with shifts in employee valuation of different forms of retirement benefits.

Wealth Distribution and Retirement Preparation Among Early Savers

This paper develops a new combined wealth measure using data from the Survey of Consumer Finances, by augmenting data on net worth with estimates of defined benefit (DB) pension wealth and expected Social Security wealth. We use this combined wealth concept to explore retirement preparation among groups of households in their pre-retirement years (40-49 and 50-59) and also to explore the concentration of wealth. We find evidence of moderate, but rising, shortfalls in retirement preparation. We also show that including DB pension and Social Security wealth results in markedly lower measures of wealth concentration. Trends toward higher concentration over time are also somewhat moderated.