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Cash balance pension plan conversions and the new economy

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  • Phillip C. Copeland
  • Julia Lynn Coronado

Abstract

Many firms that sponsor traditional defined benefit pensions have converted their plans to cash balance plans in the last ten years. Cash balance plans combine features of defined benefit (DB) and defined contribution (DC) plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of DC plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and can be viewed largely as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions. The results also shed light on the possible determinants of the broader shift from DB to DC pension coverage.

Suggested Citation

  • Phillip C. Copeland & Julia Lynn Coronado, 2003. "Cash balance pension plan conversions and the new economy," Finance and Economics Discussion Series 2003-63, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2003-63
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    References listed on IDEAS

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    1. Leslie E. Papke & Mitchell A. Petersen & James M. Poterba, 1996. "Do 401(k) Plans Replace Other Employer-Provided Pensions?," NBER Chapters, in: Advances in the Economics of Aging, pages 219-240, National Bureau of Economic Research, Inc.
    2. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
    3. John M. Abowd & Paul A. Lengermann & Kevin L. McKinney, 2002. "The Measurement of Human Capital in the U.S. Economy," Longitudinal Employer-Household Dynamics Technical Papers 2002-09, Center for Economic Studies, U.S. Census Bureau, revised Mar 2003.
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    Cited by:

    1. Alicia H. Munnell & Steven A. Sass, 2007. "The Labor Supply of Older Americans," Working Papers, Center for Retirement Research at Boston College wp2007-12, Center for Retirement Research, revised Jun 2007.
    2. Thomas, Paula B. & Williams, Paul F., 2009. "Cash balance pension plans: A case of standard-setting inadequacy," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 20(2), pages 228-254.
    3. Leora Friedberg & Michael T. Owyang, 2004. "Explaining the evolution of pension structure and job tenure," Working Papers 2002-022, Federal Reserve Bank of St. Louis.
    4. Greg Niehaus & Tong Yu, 2005. "Cash‐Balance Plan Conversions: Evidence on Excise Taxes and Implicit Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 321-352, June.

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    Keywords

    Pensions; Labor market;

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