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Pension de-risking choice and firm risk: Traditional versus innovative strategies

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  • Li, Zezeng
  • Kara, Alper

Abstract

We examine the determinants of firms defined-benefit pension plan de-risking strategy choices and their impact on firm risk. We compile a hand-collected dataset for FTSE 350 firms for the period of 2009–2017. We find that hard freezing and pension buy-ins are more likely to be implemented when pension plans have longer investment horizons. In particular, pension plans that are exposed to higher investment risk are more likely to adopt pension buy-ins. Firms with larger capital expenditure and market capitalization are more likely to utilise innovative de-risking strategies (i.e. buy-in and longevity swap) in addition to traditional strategies (i.e. soft and hard freezing). Financially constrained firms are more likely to implement longevity swap over pension buy-ins. We also find that implementing pension de-risking strategies reduce firm risk. However, the effectiveness varies depending on the strategy with buy-ins having the largest impact in reducing risk.

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  • Li, Zezeng & Kara, Alper, 2022. "Pension de-risking choice and firm risk: Traditional versus innovative strategies," International Review of Financial Analysis, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000394
    DOI: 10.1016/j.irfa.2022.102064
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    More about this item

    Keywords

    Pension De-risking; Defined-benefit pension plans; Pension freezing; Pension buy-in; Longevity swap;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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