Underfunding in Defined Benefit Pension Plans and Firms

1
Underfunding in Defined Benefit Pension Plans and
Firms Contribution Behaviorby Youngkyun Park

• Discussant Cassandra R. Cole
• Florida State University
• ARIA 2007

2
Background and Research Question

• Methods of funding pension obligations
• Factors affecting decision to use external
  financing
• The question is At what funding levels are
  firms likely to use debt financing to fund
  pension obligations?

3
Motivation

• Adverse market conditions
• Decline in pension funding
• Change in pension rules

4
Analysis

• Debt financing for pension contributions and
  expected net benefit of liability relocation
• Pension contributions and capital expenditures

5
Results

• Contributions are positively related to change in
  LTD at low funding levels
• Employer contributions are negatively related to
  capital expenditures for low funding levels

6
Items to Consider

• Focus analysis on individual quartiles and
  movement from FLt-1 and FLt
• Additional analysis of firms with multiple plans
  in which some are underfunded and others are not
• Re-examine models for possible econometric issues
  with 1Q, 2Q, 3Q, 4Q, and OF vs combined models
• Additional analysis of firms that report combined
  US and non-US plans