Essays on Pension De-risking Strategies
Thesis or dissertation
University of Exeter
This thesis includes three empirical chapters exploring how a sample of UK firms with different financial and non-financial characteristics adopt pension derisking strategies. These chapters address firms’ hedging needs, financial flexibility and governance, and treat the assets and liabilities of defined benefit (DB) pension plan as corporate assets and liabilities. Three pension de-risking strategies are considered: the reallocation of plan assets, the switch from DB to defined contribution (DC) plans, and the use of buy-ins and buy-outs. The first chapter of the thesis provides an introduction about the risks of DB pension plan and institutional background information. The second and third chapters examine how firms adjust their financial characteristics to target credit ratings in the period 2004-2013. The second chapter explores the influence of hedging needs on trade-off decisions between increasing cash holdings and reducing outstanding debt in order to achieve target credit ratings. Following Acharya, Almeida and Campello (2007), firms’ hedging needs are measured as the correlation between cash flows and future investment opportunties. Collectively, the findings suggest that firms’ hedging needs may correlate to decisions on capital structure and pension de-risking strategies. The third chapter focuses on how firms’ desire to maintain financial flexibility relates to capital structure decisions. It explores whether firms with different financial flexibility may affect trade-off decisions between increasing cash holdings and reducing debt in order to target credit ratings. Given that Byoun (2011) suggests that firms with different financial flexibility may make decision on capital structure differently, , the UK sample firms are categorised as developing firms with LFF, growth firms with MFF and mature firms with HFF. Dividend pay-out ratio is used as a proxy for financial flexibility (DeAngelo and DeAngelo, 2007). The results demonstrate that that a desire for the firm to maintain its financial flexibility relates to pension de-risking strategies used. Berger, Ofek and Yermack (1997) suggest that corporate governance affects a firm’s debt level. In this context, the fourth chapter of the thesis examines the relationship between corporate governance and capital structure using a sample of FTSE All-share firms for the period 2005-2014. The findings suggest that corporate governance measured by board size, independence and insider ownership are negatively related to debt level, while institutional ownership is positively related to debt level. This study further examines the relationship between corporate governance and pension de-risking strategies. The finding suggests that firms with large and more independent boards are more likely to invest their pension assets in bonds, whereas firms with higher institutional and insider ownership are more likely to invest their pension assets in equities. In addition, firms with more independent boards are more likely to retain their DB pension plans, while firms with greater institutional ownership are more likely to switch from DB to DC pension plans. Overall, pension de-risking strategies and capital structure are found to be related to corporate governance.
PhD in Accountancy