Employee Satisfaction and Pension Shortfall Risk
By Annita Florou, Meng Li, Peter F. Pope & Nipat Puangjampa
Defined benefit (DB) pension plans are important to employee welfare. However, they carry risk as they are subject to minimum funding requirements. We examine the effect of a relaxation in pension funding rules on employee satisfaction by exploiting the adoption of the Moving Ahead for Progress in the 21st Century Act (MAP-21). We find that employees of DB firms are less satisfied with their firms and their senior managers, after MAP-21. However, this is evident only when there is also wealth transfer to shareholders (i.e., share repurchases) or to managers themselves (i.e., higher bonus compensation) instead of investments in capital or R&D. Furthermore, the documented negative MAP-21 effects are concentrated in firms where employee interests are most at risk, namely when DB plans are significantly underfunded. Overall, our results provide novel insights into how employees react to pension plans changes.
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