Defined benefit pension de-risking and corporate risk-taking

Abstract

U.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.