Defined Benefit Pension De-Risking and Corporate Investment Policy
By Brian Silverstein
U.S. corporate sponsors of defined benefit 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 defined benefit pension plan. Results show that firms are paying premiums to de-risk when their plans are both better funded and large relative to the size of the firm. This study also finds evidence that firms will de-risk their defined benefit pension plans and increase aggregate corporate risk taking with changes in corporate investment policy. This reallocation of firm risk is reflected in greater volatility of future earnings and suggests that firms remove pension risk from their balance sheets in order to take advantage of future investment opportunities. Overall, the reallocation of risk to corporate investment policy leads to positive excess stock returns.
Source: SSRN
