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Cash‐Balance Plan Conversions: Evidence on Excise Taxes and Implicit Contracts


  • Greg Niehaus
  • Tong Yu


Firms that wish to switch from a traditional defined‐benefit pension plan to a defined‐contribution‐type plan have a choice between converting to a cash‐balance plan or replacing the defined‐benefit plan with a full‐fledged defined‐contribution plan. According to Ippolito and Thompson's (1999; Industrial Relations, 39: 228‐245) excise tax avoidance hypothesis, a number of firms have switched to cash‐balance plans because conversion allows the firm to avoid excise taxes on its excess pension assets. In contrast to existing studies, our evidence supports the excise tax avoidance hypothesis. Cash‐balance plan conversions also have been criticized for imposing pension losses on older employees. The implicit contract theory of pensions predicts that poorly performing firms would be the ones that would impose losses on employees. However, our evidence indicates that firms converting to cash‐balance plans typically are not poor performers.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jrinsu:v:72:y:2005:i:2:p:321-352
    DOI: 10.1111/j.1539-6975.2005.00125.x

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    References listed on IDEAS

    1. 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.), revised 2003.
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    Cited by:

    1. Kandice Kapinos, 2009. "On the Determinants of Defined Benefit Pension Plan Conversions," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 30(2), pages 149-167, June.
    2. Moshe A. Milevsky & Keke Song, 2010. "Do Markets Like Frozen Defined Benefit Pensions? An Event Study," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 893-909, December.
    3. Kandice Kapinos, 2012. "Changes in Firm Pension Policy: Trends Away from Traditional Defined Benefit Plans," Journal of Labor Research, Springer, vol. 33(1), pages 91-103, March.
    4. Cathy Beaudoin & Nandini Chandar & Edward M. Werner, 2010. "Are potential effects of SFAS 158 associated with firms' decisions to freeze their defined benefit pension plans?," Review of Accounting and Finance, Emerald Group Publishing, vol. 9(4), pages 424-451, November.
    5. Broeders, Dirk & Chen, An, 2010. "Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1201-1214, June.
    6. Dirk Broeders & An Chen & David Rijsbergen, 2013. "Valuation of liabilities in hybrid pension plans," Applied Financial Economics, Taylor & Francis Journals, vol. 23(15), pages 1215-1229, August.
    7. Kandice Kapinos, 2011. "Changes in Firm Pension Policy: Trends Away from Traditional Defined Benefit Plans," Working Papers 11-36, Center for Economic Studies, U.S. Census Bureau.
    8. Kandice Kapinos, 2009. "On the Determinants of Defined Benefit Pension Plan Conversions," Journal of Labor Research, Springer, vol. 30(2), pages 149-167, June.
    9. Tang, Chun-Hua, 2018. "Subjective value of the guarantees embedded in public cash-balance pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(2), pages 231-250, April.

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