@article{f0015a511e10406699a5a242cddf470a,
title = "Defined benefit pension de-risking strategy: determinants of pension buy-ins",
abstract = "Many firms have sought to de-risk their pension provision by closing or freezing their defined benefit (DB) pension plans. This shifts future pension risk onto employees, but it does not de-risk the firm{\textquoteright}s existing obligations. Pension buy-ins and buy-outs, which are a form of insurance, have become an established option for de-risking such obligations in several developed economies. This paper investigates the influence on pension buy-in transactions of the degree of risk associated with a firm{\textquoteright}s DB pension obligations and, because of the substantial costs involved, the sponsor firm{\textquoteright}s financial position. We employ hand-collected data between 2007 and 2017 to examine how pension fund and firm financial characteristics are related to both the occurrence and timing of buy-ins. Using probit analysis of UK FTSE 350 firms and a wide range of robustness checks, the findings show that firms that sponsor riskier DB pension funds, associated with higher investment risk and longer investment horizon, are more likely to engage in a pension buy-in transaction. We also find evidence that firms with greater financial slack are more likely to engage in buy-ins. Survival analysis reveals that those characteristics also tend to be significant influences upon the timing of buy-in transactions. Our study contributes to the literature on risk management in general and the literature on pension de-risking in particular, and it paves the way for research on pension buy-ins and buy-outs in other countries. Implications for firms with DB pension obligations and the insurance companies that offer pension buy-ins are identified.",
keywords = "Pension Buy-In, Defined Benefit Pension Plans, Pension de-risking, Board characteristics, Survival analysis, defined benefit pension plans, survival analysis, Pension buy-in, board characteristics, pension de-risking",
author = "Zezeng Li and Christopher Cowton",
note = "Funding Information: UK occupational pension plans, whether of the defined benefit or defined contribution variety, are voluntary, private schemes that are legally independent of the sponsor firm. They are overseen by pension trustees, who have a fiduciary responsibility to act in the best interests of the pension beneficiaries. Thus, although the assets and liabilities of DB pension plans are reported in the financial statements of the sponsor firm, and although the employer retains responsibility for funding the plan so that DB obligations can be met, the investment strategy of the pension fund reflects the responsibilities and priorities of the pension trustees rather than the preferences of the sponsor firm. Furthermore, any proposal by a firm to de-risk its DB pension exposure through a pension buy-in must be acceptable to the trustees, whose duties are owed to the beneficiaries alone, within the framework of pensions law. Funding Information: The authors are grateful for comments received from David Blake, Mathijs Van Peteghem, Konstantinos Stathopoulos and Alper Kara, and from participants at the 16th International Workshop on Pensions, Insurance and Savings, a workshop at Cass Business School, City University London, and the 42nd EAA Annual Congress. The authors are also grateful for insights gained through conversations with the head of research at Brighton Rock Group, Con Keating, and with various anonymous pension trustees and pension consultants. Finally, the authors are very grateful to the two anonymous reviewers and the Editor, Giovanna Michelon, who have been exceptionally diligent and constructive in the discharge of their responsibilities. Publisher Copyright: {\textcopyright} 2022 University of South Australia.",
year = "2023",
month = mar,
day = "27",
doi = "10.1080/01559982.2021.2024011",
language = "English",
volume = "47",
pages = "123--145",
journal = "Accounting Forum",
issn = "0155-9982",
publisher = "Elsevier BV",
number = "1",
}
