Defined benefit pension de-risking strategy: determinants of pension buy-ins

Zezeng Li and Christopher J. Cowton

Accounting Forum, 2023, vol. 47, issue 1, 123-145

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’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’s DB pension obligations and, because of the substantial costs involved, the sponsor firm’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.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/01559982.2021.2024011 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:accfor:v:47:y:2023:i:1:p:123-145

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/racc20

DOI: 10.1080/01559982.2021.2024011

Access Statistics for this article

Accounting Forum is currently edited by Carol Tilt

More articles in Accounting Forum from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().