This paper provides evidence that pension regulations can incentivize or curb risk shifting in the investment of defined benefit (DB) plan assets. We document that in the U.S., whereby the pension insurance premium charged by the Pension Benefit Guaranty Corporation (PBGC) is largely flat, financially distressed firms with severely underfunded plans shift pension investment risk. We further find that risk shifting is mitigated in the U.K. after the implementation of risk-adjusted pension insurance premium, and in the Netherlands where full pension funding is mandatory. Overall the results in this paper lend support to the view that structural flaws in the U.S. statutory pension insurance scheme incentivize high-risk sponsors to gamble their pension assets when distress terminations of their plans become foreseeable.
GUAN, Y. and LUI, D. (2016). The Effect of Regulations on Pension Risk Shifting: Evidence from the U.S. and Europe. Journal of Business Finance and Accounting, 45(5), pp. 765–799.