Corporate pension funding strategies: Industry and regulatory effects

This study empirically examines whether industry classification has measurable effects on the strategic funding behavior of corporate sponsors. Moreover, the current analysis investigates the impact and effectiveness of the Retirement Protection Act of 1994 (RPA94), which tightened regulatory controls on pension funding standards. The paper employs aggregated firm-based data regulated by FASB87 from 1991–1997.; The analysis of the industry and regulatory effects are estimated under the implicit hypothesis that firms integrate the assets and liabilities of their defined benefit pension plan(s) into their overall corporate policies. This study focuses on four strategic determinants of corporate pension funding behavior: the pension put, financial slack, tax arbitrage, and unionization. Consistent with the integration perspective, the empirical results provide strong support for the strategic funding hypotheses with the pension put and unionized workforces explaining low funding levels while financial slack and tax benefits explaining high funding levels.; Prior studies of an industry effect in pension funding behavior are limited to variations in intercept coefficients, and therefore, have not distinguished each industry's propensity to utilize the strategic funding policies. To address this limitation the current analysis develops a fully interactive cross-effect dummy variable model of 22 industry groupings for testing the intercept and slope differences at the group-wise and case-by-case level. Furthermore, industry by industry regressions are estimated to evaluate the differences in magnitude and significance of each industry's utilization of the strategic funding policies. Strong support is generated for the existence of an industry effect in pension funding behavior. In particular the underfunding policies of pension put and unionization are significant for nearly 75% and 60% of the industry groupings, respectively, while the overfunding policies of tax and financial slack exhibit weaker support, each reporting 25% significance across industry groupings.; The current analysis also examines the impact of RPA94 on the persistent problem of plan underfunding. By focusing on a subset of underfunded firms, corporate funding levels increased between 8.5% and 12.9% with the passage of RPA94. Furthermore, moderate support is provided that RPA94 altered corporate sponsor's strategic funding behavior.