Corporate Pension Risk Transfers

Abstract

Between 2012 and 2020, U.S. corporate sponsors of defined benefit (DB) pension plans transferred around $100 billion pension obligations for more than one million plan participants to insurance companies using pension risk transfers (PRTs). We model PRT decisions as an option exercise problem and assemble a new data set of PRTs. Consistent with our model, the propensity to conduct a PRT is higher for firms with higher macroeconomic flow-through costs, lower stock market investments, more inactive employees, and lower default risk. We highlight potential implications of PRTs for the remaining sponsor pool and compare PRTs to other de-risking strategies.

Keywords: Pension funds, defined benefits, de-risking strategies, pension protection act, life insurance

JEL Classification: G11, G22, G23, J32