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The Tax Cut and Jobs Act (2017) as a driver of pension derisking: a comprehensive examination

Anantharaman, Divya, Kamath, Saipriya and Li, Shengnan (2020) The Tax Cut and Jobs Act (2017) as a driver of pension derisking: a comprehensive examination. In: Hawai'i Accounting Research Conference-2020, 2020-01-03 - 2020-01-05, University of Hawai'i-Hilo, Hilo, Big Island, Hawai'i.

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Abstract

Corporate defined-benefit (DB) pension sponsors in the US are increasingly on a path of “derisking” – by moving pension assets away from equities and towards fixed-income securities that better match the obligations, or by transferring obligations off their balance sheets entirely, via settlements with insurance companies or lump-sum payouts to beneficiaries. In this study, we examine whether the Tax Cut and Jobs Act of 2017 (“TCJA”) served as a driver of pension derisking. Examining behavior in the window between the TCJA’s announcement and its lower tax rate going into effect, we document that sponsors with stronger incentives to derisk their pensions tend to contribute more into their plans in that window, while deductions can still be taken at the higher tax rate – specifically, sponsors expecting large and uncertain contribution requirements for pensions in the future, facing high regulatory costs to maintaining plans, and with competing demands on cash flows. Examining behavior after the TCJA goes into effect, we document that the firms with the largest TCJA-triggered contributions also engage in more derisking subsequently, both by shifting asset allocations and by transferring obligations to other parties. In sum, our findings point to the TCJA having acted as a trigger for what could be a fundamental reorganization of the DB pension landscape in the US.

Item Type: Conference or Workshop Item (Paper)
Official URL: http://hdl.handle.net/10125/70491
Additional Information: © 2021 The Authors
Divisions: Accounting
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HJ Public Finance
K Law > KF United States Federal Law
JEL classification: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J32 - Nonwage Labor Costs and Benefits; Private Pensions
K - Law and Economics > K3 - Other Substantive Areas of Law > K34 - Tax Law
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Date Deposited: 25 Jan 2021 08:54
Last Modified: 29 May 2021 23:28
URI: http://eprints.lse.ac.uk/id/eprint/108535

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