Are Companies Offloading Risk onto Employees in Times of Uncertainty? Insights from Corporate Pension Plans

We investigate how firms adjust corporate pension plans in response to economic policy uncertainty (EPU). Using a sample of US-listed firms, we find that firms increase pension underfunding levels when facing higher EPU. The result is robust to controlling for pension portfolio returns, discount rates, plan sizes, pension liability, numbers of employees, other macroeconomic factors, difference-in-differences and instrumental variable estimation, and additional evidence of pension risk-shifting. Further analysis reveals that financial distress and information asymmetry induced through EPU are the potential channels. The effect is stronger for firms having CEOs being excessively paid, using cash flow as a performance metric in CEO compensation, paying high dividends, and having short-term institutional investors, whereas the presence of unions, positive corporate culture, and social capital alleviate the effect. Notably, managers, not shareholders, appear to be the party reaping the benefits. Our findings suggest that firms may shift risk to employees in response to heightened uncertainty and institutional characteristics play a moderating role in this crucial business ethics issue.