Corporate Pension Risk-Taking in a Low Interest Rate Environment

We study the effect interest rates have on the funding pressure and risk-taking behavior of defined-benefit US corporate pension plans. In the low-interest-rate environment following the financial crisis, many pension plans became severely underfunded. Using a difference-in-differences analysis and a regulatory shock, we show that exogenous changes in interest rates, which release funding pressure, decrease the incentives of underfunded plans to invest in riskier asset classes and shift risk to employees through pension freezes. However, voluntary pension contributions of sponsor firms are also reduced