How do Private Equity Buyouts Affect Employee Pension Plans? (2024)

See all articles by Wensong Zhong

Wensong Zhong

University of Arkansas - Sam M. Walton College of Business

Abstract

Using data from the Form 5500 filings, I analyze the impact of private equity (PE) buyouts on the defined benefit (DB) plans of target firms. I find that following a buyout, DB plans are more likely to be frozen or terminated, and defined contribution (DC) plans are not likely to provide sufficient substitutes. Regarding the actuarial assumption and the pension characteristics, I find an increase in the pension liability discount rate and decreases in the projected benefit obligations (PBO), pension assets (PA), and contributions, but I do not find significant effects on funding ratio. Additionally, I find that investment strategies for these plans become riskier, with a higher allocation to equities and lower allocations to cash, government securities, insurance accounts, and mutual funds. However, there is no significant effect on realized returns. Overall, these results suggest that private equity buyouts may negatively affect the retirement welfare of DB plan participants of target firms.

Zhong, Wensong, How do Private Equity Buyouts Affect Employee Pension Plans? (May 5, 2024). Available at SSRN: https://ssrn.com/abstract=4818003 or http://dx.doi.org/10.2139/ssrn.4818003