The Tax Cut and Jobs Act (2017) as a Driver of Pension Derisking: A Comprehensive Examination

60 Pages Posted: 12 Mar 2021

See all articles by Divya Anantharaman

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems

Saipriya Kamath

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Shengnan Li

Rutgers, The State University of New Jersey - Accounting & Information Systems

Date Written: February 22, 2021

Abstract

Corporate defined-benefit (DB) pension sponsors in the US are increasingly on a path of “derisking” – by moving pension assets away from equities and towards fixed-income securities that better match the obligations, or by transferring obligations off their balance sheets entirely, via settlements with insurance companies or lump-sum payouts to beneficiaries. In this study, we examine whether the Tax Cut and Jobs Act of 2017 (“TCJA”) served as a driver of pension derisking. Examining behavior in the window between the TCJA’s announcement and its lower tax rate going into effect, we document that sponsors with stronger incentives to derisk their pensions tend to contribute more into their plans in that window, while deductions can still be taken at the higher tax rate – specifically, sponsors expecting large and uncertain contribution requirements for pensions in the future, facing high regulatory costs to maintaining plans, and with competing demands on cash flows. Examining behavior after the TCJA goes into effect, we document that the firms with the largest TCJA-triggered contributions also engage in more derisking subsequently, both by shifting asset allocations and by transferring obligations to other parties. In sum, our findings point to the TCJA having acted as a trigger for what could be a fundamental reorganization of the DB pension landscape in the US.

Keywords: TCJA, defined-benefit plans, voluntary contributions, derisking, pension asset allocation, pension settlements or buyouts

JEL Classification: J32, K34, H32, H26, G23

Suggested Citation

Anantharaman, Divya and Kamath, Saipriya and Li, Shengnan, The Tax Cut and Jobs Act (2017) as a Driver of Pension Derisking: A Comprehensive Examination (February 22, 2021). Available at SSRN: https://ssrn.com/abstract=3790854 or http://dx.doi.org/10.2139/ssrn.3790854

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
#916
Newark, NJ 07102
United States

Saipriya Kamath (Contact Author)

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

United Kingdom

Shengnan Li

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

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