Abstract:
Many financially insolvent private pension funds have put Defined Benefit (DB) plans under a microscope over the last few decades. Despite government imposed rules to ensure minimum required funding, sponsors might choose to underfund the plans for short term benefits. This paper investigates the influences— plan and firm specific characteristics, and enforcement of full funding limits— on sponsor contributions (1991-2016) to DB pension plans in the US private sector. We apply Heckman model to the voluntary contributions to eliminate sample selection bias resulting from decisions to contribute only the legally required minimum. Allowing tax deductible contributions up to
a full funding limitation has a positive marginal effect on voluntary contributions. Sponsors are less likely to contribute when the S&P stock return increases, but more likely when the 10-year treasury rate does. A lower pension plan funding ratio than required increases the likelihood of contribution.
