Leonard De Haan, Ph.D., Economics and Research Division, De Nederlandsche Bank, P.O. Box 98, Amsterdam, 1000 AB, Netherlands, E. Philip Davis, Ph.D., Brunel University, West London, Uxbridge, UB8 3PH, United Kingdom, and Sybille G. Grob, M.B.A., Financial Stability Division, De Nederlandsche Bank, P.O. Box 98, Amsterdam, 1000 AB, Netherlands.
This study presents empirical evidence on the influence of sponsoring companies on the funding and portfolio allocation decisions of their defined benefit pension funds. Several hypotheses taken from the theoretical literature are tested using a microdataset of around 550 Dutch company pension funds over the ten year period 1996-2005, combined with a microdataset on 100 of their sponsoring firms.
We estimate different models using Generalized Least Squares and Probit estimators.
Our empirical tests address the influence of sponsoring firms on pension funds’ cover ratios, underfunding risks, as well as their decisions concerning the proportion of their investment portfolios that is allocated to shares. Moreover, we directly investigate the determinants of sponsor contributions to the pension fund. This is the first paper to address these theoretical issues in a comprehensive manner.
We find empirical support for the following theoretical hypotheses:
- Pension funds have lower cover ratios when their sponsoring companies have high leverage.
- Pension funds have lower cover ratios when their return on assets is relatively low.
- Pension funds have lower cover ratios and receive lower sponsor contributions when their sponsoring firm is small.
- Defined benefit pension funds invest more in shares when their sponsoring companies have high leverage.