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Article
Publication date: 1 August 1997

Edward J. Zychowicz

This paper examines the formation of pension plans from a corporate finance perspective. The theoretical underpinnings for selecting a defined‐benefit or…

Abstract

This paper examines the formation of pension plans from a corporate finance perspective. The theoretical underpinnings for selecting a defined‐benefit or defined‐contribution plan are discussed and used to form empirically testable hypotheses. Linear probability and logit models are used to identify corporate financial characteristics that affect the likelihood of forming a defined‐benefit or defined‐contribution plan. The results strongly indicate that firms with high degrees of debt and intangible assets are least likely to form defined‐benefit plans in a post‐reversion situation, while firm size enhances the probability of forming defined‐benefit plans. The growth in private retirement plans over the past quarter century has made pension fund management a critical concern for many financial managers. The total amount of assets in private pension plans amounted to approximately $150 billion in 1970, while this figure was about $2 trillion in 1989. A corresponding trend to this growth has been an acceleration in the formation of defined‐contribution plans relative to defined‐benefit plans. In 1975 about 29 percent of all plans were defined‐contribution plans, and 71 percent were defined‐benefit plans. In contrast, defined‐contribution plans comprised 55 percent of all plans in 1988, while 45 percent were defined‐benefit plans.1 Gustman and Steinmeier (1987) suggest that the shift to defined‐contribution plans in recent years may be attributable to shifts in jobs in the economy away from the manufacturing sector and toward the service sector. Furthermore, the role of unions, firm size, and administrative costs have also been sighted as factors which partially explain the economy wide shift toward defined‐contribution plans (see Gustman and Steinmeier (1989), Clark and McDermed (1990), and Kruse (1991)). In this paper, we address the pension choice by examining the formation of individual plans from a corporate finance perspective. Specifically, we examine the pension choice issue when firms are faced with making this decision after the termination of an overfunded defined‐benefit plan. The remainder of this paper is organized as follows. Section I discusses the possible motives for selecting one plan over the other, and develops testable hypotheses. The data and methodology are discussed in section II, while section III presents the empirical results. Section IV summarizes and concludes the paper.

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Managerial Finance, vol. 23 no. 8
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 2 February 2015

Frank Mullins

The funding of defined-benefit plans has garnered the attention of academicians, practitioners, and policymakers. Drawing upon agency and organizational control theories…

Abstract

The funding of defined-benefit plans has garnered the attention of academicians, practitioners, and policymakers. Drawing upon agency and organizational control theories, this study investigates the implications of board independence on changes in defined-benefit funding. Using a panel dataset of S&P 500 companies sponsoring defined-benefit plans, the author finds that corporate boards matter. Specifically, CEO duality and outside director representation are associated with year-to-year decreases in defined-benefit funding. Conversely, outside director ownership is related to year-to-year increases in defined-benefit funding. Furthermore, outside director ownership moderated the relationship between outside director representation and defined-benefit funding such that outside director representation is associated with year-to-year increases in defined-benefit plan funding when the percentage of outside director ownership is high.

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Advances in Industrial and Labor Relations
Type: Book
ISBN: 978-1-78441-380-4

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Article
Publication date: 30 September 2008

Sharad Asthana

The purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.

Abstract

Purpose

The purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.

Design/methodology/approach

The paper uses empirical methodology (univariate and multivariate) to test the research hypotheses.

Findings

Industry norm, average employee age, financial structure, and firm size are significant factors in the determination of the proportion of compensation that is deferred. Industry norm, financial structure, and firm size are significant factors that determine the percentage of deferred compensation that is negotiated as defined benefits. Finally, industry norm, corporate tax rates, and cash flow help explain the percentage of defined benefits that are paid in the form of retiree health benefit plans.

Research limitations/implications

Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations in 2000 and 2001.

Practical implications

The trends in post‐retirement benefits reported in this paper are important for policy makers.

Originality/value

These findings have implications for the baby boomers. The trend to offer smaller proportion of compensation as deferred benefits reflects the increasing costs of deferral to the employers. This increases the employees' responsibilities to save on their own. This also would shift the retirees' dependence on the public pension system for their retirement income. The trend to favor defined‐contribution plans instead of defined‐benefit plans reflects the employers' attempts to diversify their risks of paying promised post‐retirement benefits by transferring the risk to the employee. On the other hand, the popularity of defined‐contribution pension plans also reflects the increased Government's incentives to encourage savings via 401‐k plans and employee's willingness to manage their own pension portfolios.

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Accounting Research Journal, vol. 21 no. 2
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 17 August 2015

Shafiqur Rahman

This paper aims to compare and contrast alternative pension plans in the market place and their status as zakatable wealth or property. These plans differ in terms of who…

Abstract

Purpose

This paper aims to compare and contrast alternative pension plans in the market place and their status as zakatable wealth or property. These plans differ in terms of who is responsible for providing funds for pension benefit to the retirees upon retirement and who is responsible for bearing investment risk. Whether a pension plan is subject to zakat immediately or upon receipt at retirement depends on immediate accessibility to and ownership of the funds in the account. It makes no difference whether employer and/or the employee is (are) responsible for funding the plan and who bears the investment risk.

Design/methodology/approach

Descriptive and analytical methods were used.

Findings

There is consensus among Muslim jurists and shariah scholars that mandatory retirement plans offered as a part of compensation and benefit package for a job are subject to zakat when money is received upon retirement and non-mandatory plans offered as replacement for or supplement to employer-sponsored plans with voluntary employee participation are subject to zakat in each year of employment.

Originality/value

There is no prior research work in the extant literature examining zakatability of alternative retirement plans offered in the US marketplace. This paper fills this void and provides a comprehensive survey and analysis of all available retirement plans and their treatment with respect to zakat.

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International Journal of Islamic and Middle Eastern Finance and Management, vol. 8 no. 3
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 1 March 2015

Jared J. Llorens

Compensation systems serve a critical role in strategic human resources management, and over the past twenty-five years, there have been an increasing number of public…

Abstract

Compensation systems serve a critical role in strategic human resources management, and over the past twenty-five years, there have been an increasing number of public sector reform efforts aimed at better aligning compensation practices with institutional workforce needs. While many past reforms have been performance driven, the nationʼs most recent economic downturn has served as potent catalyst for a renewed focus on public sector compensation, particularly reforms to public sector retirement benefits. However, given the traditional importance of public sector retirement benefits within broader bureaucratic structures, these new reforms hold the potential to substantially alter human capital capacity in the public sector. Using wage and retirement benefit data from the U.S. Census Bureauʼs Current Population Survey and National Compensation Survey, this paper finds that state and local governments face significant threats to their long-term human capital capacity in light of potential benefit reforms that place a disproportionate emphasis upon competitive wage rates.

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International Journal of Organization Theory & Behavior, vol. 18 no. 1
Type: Research Article
ISSN: 1093-4537

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Article
Publication date: 7 January 2019

Bridget McNally, Anne M. Garvey and Thomas O’Connor

This paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring…

Abstract

Purpose

This paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards.

Design/methodology/approach

The approach is a theoretical analysis of the relevant reporting standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment.

Findings

Where a pension fund engages in asset liability matching and invests in “risk-free” assets, the term, quantity and duration/maturity of which is intended to match some or all of its scheme liabilities, the required accounting treatment potentially results in the sponsoring company’s financial statements reporting fluctuating surpluses or deficits each year which are potentially ill informed and misleading.

Originality/value

Pension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers; however, the dangers posed by theoretical nature of the calculation have largely gone unreported.

Details

Journal of Financial Regulation and Compliance, vol. 27 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 24 October 2018

Rahul Verma and Priti Verma

The purpose of this paper is to investigate the existence of behavioral biases, disposition effect and house money effect in investment decisions of defined benefit

Abstract

Purpose

The purpose of this paper is to investigate the existence of behavioral biases, disposition effect and house money effect in investment decisions of defined benefit pension funds. It investigates the determinants of portfolios by examining whether pensions display risk seeking or risk aversion behavior in reaction to prior gains and losses.

Design/methodology/approach

The first research question is to examine the impact of prior period’s return and αs on existing portfolio allocation in equity, debt, real estate and other assets. In order to test this relationship, four separate regressions are estimated using the pooled data. Regression helps in examining the relationship between prior gains with current allocation in four categories of assets of varying degrees of riskiness (stocks, debt, real estate and other assets). In order to investigate the second research question on whether pension funds increase (decrease) their investments in risky (safer) assets due to prior gains and αs, the four variables representing the changes in portfolio allocation for each asset class over one period are employed. These changes in allocation are regressed against the prior year’s actual return, expected return, αs and a set of control variables.

Findings

The results suggest significant negative (positive) relationship between prior positive returns and αs with portfolio allocation in risky (safer) assets. Also, there is an increased (decreased) investment in safer (risky) assets following prior period’s positive returns and αs. The findings confirm the existence of disposition effect, while there is no evidence of house money effect.

Originality/value

The portfolio allocation of pension plans provides unique setting to investigate the relevance of behavioral finance and examine the role of psychological biases on risk taking. This study attempts to contribute to the literature by empirically investigating whether the tenets of behavioral finance are relevant in defined benefit pension fund’s portfolio allocation decisions. Specifically, it focuses on the determinants of portfolio choices by directly investigating pension funds’ reaction to prior period’s actual as well as risk adjusted return (or αs – the difference between the actual and expected return).

Details

Review of Behavioral Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 25 June 2019

Tomoki Kitamura and Kozo Omori

The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is…

Abstract

Purpose

The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented by the position of a vulnerable option is solved.

Design/methodology/approach

The simple traditional contingent claim approach is applied, which considers only the distributions of corporate cash flow, without the model expansions, such as market imperfections, needed to explain the firms’ behavior for DB plans in previous studies.

Findings

The authors find that the optimal solution to the equity holders’ DB investment problem is not an extreme corner solution such as 100 percent investment in equity funds as in the literature. Rather, the solution lies in the middle range, as is commonly observed in real-world economies.

Originality/value

The major value of this study is that it develops a clear mechanism for obtaining an internal solution for the equity holders’ DB investment problem and it provides the understanding that the base for corporate investment behavior for DB plans should incorporate the fact that in some cases the optimal solution is in the middle range. Therefore, the corporate risk-taking behavior of DB plans is harder to identify than the results of the empirical literature have predicted.

Details

Managerial Finance, vol. 45 no. 8
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 28 October 2002

Gale E. Newell, Jerry G. Kreuze and David Hurtt

With the bankruptcy of Enron and the accompanying loss of pension benefits of its employees, pensions have recently received significant press. Accounting for pension plan

Abstract

With the bankruptcy of Enron and the accompanying loss of pension benefits of its employees, pensions have recently received significant press. Accounting for pension plan obligations, for defined benefit plans in particular, requires companies to make assumptions regarding discount rates, projected salary increases, and expected long‐term return on plan assets. Such assumptions, in turn, determine the funding status of the pension plan and the annual pension expense. Higher assumed discount rates reduce the pension obligation, enhance the funding status of the plan, and reduce any lump‐sum payments. Higher expected return on assets reduces the current pension expense. This study investigates the relationship between pension plan assumptions and the funding status of a pension plan. The results reveal that companies with pension plans that are more fully funded assume higher discount rates and expected long‐term return on assets than do companies with less funded plans. The effect of these assumptions is that higher discount rate assumptions lead to better funding status, and higher expected long‐term rates of return on assets partially offset the pension expense impacts of these higher discount rate assumptions. We are doubtful that more funded plans collectively should be assuming higher discount rates and expected long‐term return on plan assets, especially since the actual return on plan assets investigated did not correlate with these assumptions.

Details

American Journal of Business, vol. 17 no. 2
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 30 September 2014

Ebony de Thierry, Helen Lam, Mark Harcourt, Matt Flynn and Geoff Wood

The purpose of this paper is to use the theoretical and empirical pension literatures to question whether employers are likely to gain any competitive advantage from…

Abstract

Purpose

The purpose of this paper is to use the theoretical and empirical pension literatures to question whether employers are likely to gain any competitive advantage from degrading or eliminating their employees’ defined benefit (DB) pensions.

Design/methodology/approach

Critical literature review, bringing together and synthesizing the industrial relations, economics, social policy, and applied pensions literature.

Findings

DB pension plans do deliver a number of potential performance benefits, most notably a decrease in turnover and establishment of longer-term employment relationships. However, benefits are more pronounced in some conditions than others, which are identified.

Research limitations/implications

Most of the analysis of pension effects to date focuses primarily on DB plans. Yet, these are declining in significance. In the years ahead, more attention needs to be paid to the potential consequences of defined contribution plans and other types of pension.

Practical implications

In re-evaluating DB pensions, firms have tended to focus on savings made through cost cutting. Yet, this approach tends to view a firm's people as an expense rather a potential asset. Attempts to abandon, modify, or otherwise reduce such schemes has the potential to save money in the short term, but the negative long-term consequences may be considerable, even if they are not yet obvious.

Originality/value

This paper is topical in that it consolidates existing research evidence from a number of different bodies of literature to make a case for the retention of DB pension plans, when, in many contexts, they are being scaled back or discarded. It raises a number of important issues for reflection by practitioners, and highlights key agendas for future scholarly research.

Details

Employee Relations, vol. 36 no. 6
Type: Research Article
ISSN: 0142-5455

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