Pension De-Risking and Firm Risk: Traditional versus Innovative Strategies

We examine the determinants of firms’ defined benefit pension plan de-risking strategy choices, and their impact on firm risk using a unique dataset covering FTSE 100 firms for the period of 2009-2017. In particular, we investigate which firm financial and pension fund characteristics influence de-risking strategy choices and their impact on firm risk, proxied with earnings and return volatility, default and credit risk. Results show that de-risking strategies are more likely to be implemented when pension plans have a longer investment horizon, indicating a higher level risk exposure due to investment uncertainty. We find that firms with larger pension plans prefer innovative de-risking strategies (buy-in/buy-out and longevity swap), as these reduce the risk more effectively removing various pension fund risk altogether, over the traditional ones (soft and hard freezing). Firms with higher market capitalization and that are financially unconstrained implement innovative pension de-risking strategies as they have the ability to pay the cash premiums required. We also find that pension de-risking strategies reduce firm risk. Hard freezing and pension buy-ins/buy-outs have the most significant impact in reducing firm risk. In contrast, soft freezing and longevity swaps tend to have a weaker or no impact on the overall firm risk.