An empirical analysis of motives for termination of defined benefit pension plans
Cole, Cassandra Renee
MetadataShow full item record
Statistics gathered by the Pension Benefit Guaranty Corporation indicate there was a great deal of variation in the number of standard defined benefit pension plan terminations between 1985 and 1995, reaching an all time high of almost 12,000 in 1990. In response, there have been several academic studies published that tried to explain why firms were terminating these plans. Prior studies attempted to explain this phenomenon by observing firm level data of overfunded defined benefit pension plan terminations. This study attempts to expand prior literature by creating a more comprehensive examination of the termination decision. In doing so, the study intends to provide answers to three questions. First, do motives for termination differ by funding status? Second, do motives vary in when they become evident and have they changed over time? Finally, are companies honest about why they are terminating plans? The results of the study indicate that there are differences in the motives for termination of overfunded and fully funded defined benefit pension plans and that these motives do vary in when they become evident. Overfunded defined benefit plans are motivated by financial distress, expropriation, tax advantages and regulation. The results suggest that if termination is motivated by financial distress or the cost of plan administration, firms are likely to terminate their overfunded plans within one year. If the termination is motivated by other reasons, the motives are evident two or three years prior to termination. For fully funded plans, the results only support the financial and regulatory motives for termination. These plans also seem to be more sensitive to regulatory changes than overfunded plans.