James Brander and Seán Finucane (Presenter)

1. Pensions and Corporate Performance: Effects of the Shift from Defined Benefit to Defined Contribution Pension Plans James Brander and Seán Finucane (Presenter)

2. Outline • Background • Previous literature • Theoretical model • Data • Results

3. Background • Over $10 trillion currently in US pension plans • Long slow shift from Defined Benefit to Defined Contribution • What effect does this have on corporate performance?

4. Previous Literature • Incentive effects (Lazear (1983)) • Kotlikoff and Wise (1984) • Shift from Defined Benefit to Defined Contribution (Friedberg and Webb, 2003) • Relationships between pensions and productivity (Cornwell and Dorsey, 1997,2000)

5. Pension accruals – DB vs. DC Friedberg and Webb (2003)

6. Why change from DB to DC? • DC plans shift market risk to employee • DC plans are perceived as less expensive • DC plans are perceived as less risky • DC plans are more portable • DC plans have smooth contributions through the lifetime compared to DB plans • So why doesn’t everyone go DC?

7. Why would this affect corporate performance? • We presume a correlation between the desire to work longer (i.e. retire later) and worker productivity • Compensation may differ from the value of the marginal product • Those who want to work longer are more likely to choose firms with DC plans • Those who are unhappy can leave more easily with a DC plan

8. Theoretical model Vt(0) = u(wt ,et ,α) + γE(Vt+1) Vt(1) = u(Pt) NVt = Vt(1) – Vt(0) πt = st(wt,et,β) + γE(πt+1)

9. Data – P&I • Pensions and Investments magazine survey of top 1000 pension funds • Survey augmented by P&I research staff • Contains total assets, fine breakdown of asset allocations • Our study only uses publicly traded companies for the sample • Firm data from Compustat

10. Alternative Data Source – Form 5500 • Must be submitted by all firms in the US with over 100 employees to the Department of Labor (every 3 years for smaller firms) • Electronic data available from 1993 to present • Includes broad asset allocation data, actuarial assumptions and total liabilities

11. Pension assets

12. Largest corporate sponsors

13. Shift to DC plans

14. Panel Structure

15. Year 1997 1998 1999 2000 2001 2002 2003 aggregate DC share 3.24** (2.5) 3.08** (2.1) 8.2*** (5.8) 4.77*** (3.5) 6.27*** (3.8) 8.52*** (5.6) 6.34*** (4.9) 5.42*** (9.9) constant 4.0*** (6.0) 3.3*** (4.2) 1.6** (2.2) 2.4 *** (3.3) -.6 (.6) -1.5* (1.7) .1 (0.2) 1.5*** (5.1) adjusted R2 .01 .01 .07 .03 .03 .07 .05 .03 observations 383 419 423 422 407 420 405 2879 Initial Results – Simple OLS (ROA=ß*DCShare)

16. OLS with controls

17. Panel Results

18. Dependent Variable 1998-2003 average roa 1998-2003 average roa Change in roa: 1997-2003 2003 roa 1997 DC share 6.60*** (4.80) 5.50*** (3.81) 6.24** (2.47) 1997-2002 change in DC share 7.53** (2.28) 1997 return on assets .32*** (3.81) -.81*** (7.0) .22*(1.7) industry fixed effects F(16,219) = 92 *** F(17,218) = 1458 *** F(16,218) = 199*** F(17,218) = 2393*** constant 0.58 (0.3) -1.5 (1.0) -0.95 (0.4) 2.1 (0.9) robust errors Yes yes yes yes R2 .30 .42 .41 .18 observations 238 238 238 238 Balanced Panel

19. Conclusions • Increased use of defined contribution plans seems to be related to increased corporate performance (ROA, OROA, ROE) • We interpret this to be caused by improved worker mobility and retirement decisions

20. Comments? Suggestions?