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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Cash Balance Pension Plan Conversions and the New Economy
Julia Lynn Coronado and Phillip C. Copeland

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.

Keywords: Pensions, labor markets, cash balance pensions

Full paper (278 KB PDF)

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Last update: December 15, 2003