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The Employment Contract Broken? The (Non)Abandonment of Defined Benefit Pensions

The Employment Contract Broken? The (Non)Abandonment of Defined Benefit Pensions . J. Adam Cobb Ross School of Business University of Michigan. Retirement plan trends: participation by plan type, 1978-2006 (private-sector, active-workers).

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The Employment Contract Broken? The (Non)Abandonment of Defined Benefit Pensions

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  1. The Employment Contract Broken? The (Non)Abandonment of Defined Benefit Pensions J. Adam Cobb Ross School of Business University of Michigan

  2. Retirement plan trends: participation by plan type, 1978-2006 (private-sector, active-workers)

  3. What does the shift from DB to 401(k) plans tell us about the employment contract? • The employment contract is a governance instrument that links a firm to its workers • DB plans encourage long-term employment relationships (Kotlikoff & Wise, 1985; Lazear, 1979) • DB pensions increase tenure (Bartel & Bojas; 1977; Gustman & Steinmeier 1993; Even and MacPherson, 1996; Munnell et al., 2006) • 401(k) and other DC plans do not encourage long-term relationships • May increase mobility (Munnell et al., 2006)

  4. My contribution to the study of changing employment contracts • Existing accounts emphasize market, technological or institutional forces (e.g. Appelbaum & Batt, 1994; Cappelli, 1999; Osterman et al., 2001) • I examine firm-level factors that led to decline in DB pensions, which vouchsafed long-term employment • Power struggles among investors, managers and labor are the mechanism responsible • As the bases of power among these three shift, firm-level outcomes change

  5. Organizational coalitions, power and the employment contract • Firms are a site of contestation • The relative power of each group helps determine the choice of organizational strategy • Firms comprised of coalitions with varying and competing interests (Cyert & March, 1963; March, 1962) Investors Management Employees

  6. Owner types • Different types of owners have different interests (Berrone et al., 2010; Palmer, et al., 1987; Useem, 1996) • I argue that a firm’s use of DB pensions is dependent upon what type of owner controls the firm • Passive financial investors • Active financial investors • Dispersed (i.e. management control) • Employee • Family • Mutual/cooperative • Other privately owned • ‘Miscellaneous’ • Omitted category in analyses

  7. Groups’ power and interests Summary of hypotheses • Financial investor power • Negativelyrelated to DB plan participation • Manager power • Positively related to DB plan participation • Employee power • Positively related to DB plan participation

  8. Methods • Sample • Firms in either the 1980 Fortune 500, 1994 Fortune 1000 or 2006 Fortune 500 • Unbalanced sample of 1,357 firms • Dependent variable • Log number of employees in DB plans • IRS Form 5500 • Track firms annually by employee identification number (EIN) • Over 120,000 plans • Aggregate to firm level • 24,756 firm-year observations • Estimate employees in multiple plans

  9. Independent variables • Ownership • Largest owner, controlling at least 5% of firm stock • Hand-coded the type of owner • Company proxy statements, CDA/Spectrum 5% Stock Holdings • Passive finance (0,1) • Active finance (0,1) • Manager-controlled (0,1) • No owner owns 5% • Employee (0,1) • Takeover protection • State laws • IRRC • Industry unionization • Annual unionization rate in firm’s focal industry • Inertia • Additional controls • Owner types • Experience with DB plans • (j – year of first recorded DB plan) • Calculated from Form 5500 • Size • Employees & revenues • Age • Performance (3 year avg ROA) • LTD/Assets • Bankruptcy • Industry DB rates • Overall stock market performance • Industry size • Year dummies

  10. Time-series, fixed-effects regression on log of participants in DB plans, 1982-2006 Select control variables • Financial investors • Reduced ownership categories • Management power H3: no support H4: no support H1: partial support H2: partial support

  11. Conclusions • What is responsible for breaking employment contracts? • Decline of organized labor • Increased power of financial investors within firms • Other takeaways • Family owned-firms do not make for beneficent employers! • The longer a firm had a plan, the harder it is to reduce or abandon its use

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