Pension bailouts lead to opportunistic behavior

By Alexandra Richter

BUFFALO, N.Y. —  At an estimated cost of nearly $100 billion in taxpayer funds, bailouts have negatively affected the management and administration of multi-employer pension plans (MEPPs), according to new research from the University at Buffalo School of Management. 

The study examines how MEPPs, collectively-bargained pension plans that provide retirement benefits for 11 million participants, respond to cash bailouts, particularly after the 2021 American Rescue Plan Act (ARP). When signed into law, this act established the Special Financial Assistance program, which provided cash infusions for certain MEPPs.

“We find that the pension bailout increased plans’ incentives to engage in risk-taking, opportunistic and self-serving behaviors.” says Michael Dambra, PhD, associate professor and Kenneth W. Colwell Chair of Accounting and Law in the UB School of Management.

In the first large-scale study on the economic consequences of a pension bailout, the research analyzes the behavior of more than 1,000 MEPPs from 2018 to 2021 – including the first full year after the American Rescue Plan Act – using data from the Form 5500 Annual Report filed with the Department of Labor. Each report includes information about the plan, such as its financial condition, operations and participation. The research compared investment allocations and pension administration of MEPPs to collectively-bargained single employer pension plans (SEPPs), which have never received bailout funding.

The study finds that the risks taken in the management and administration of MEPPs extend to increasing investment allocations to riskier assets, increasing future benefit payments for participants, and increasing administrative fees relative to SEPPs after President Biden signed the ARP into law. In addition, the researchers offer evidence suggesting some plans take action to increase the likelihood qualifying for bailouts.

"The potential of future bailouts may actually incentivize institutions to take on more risk,” says Dambra. “It shifts the consequences of increased risk-taking away from the companies sponsoring these underfunded pension plans and onto taxpayers.”

As pension funding shortfalls remain a problem in the United States, both in the private and public sectors, taxpayers and policymakers need critical data and analyses to find a solution for current and future retirees. In particular, current estimates suggest that public sector pensions are collectively underfunded by approximately $6.5 trillion. This research suggests that cash bailouts, while temporarily relieving underfunding issues for affected plans, are unlikely to solve the structural underfunding issues present in both private and public sector pension plans and may worsen the issue over time.

Dambra collaborated on the study with Phillip J. Quinn, PhD, associate professor of accounting at the University of Washington Foster School of Business and John L. Wertz, PhD, assistant professor of accounting at the Indiana University Kelley School of Business.