Conclusion
This study aims to investigate the relationship between a sponsoring firm and its associated pension funds, more specifically how pension fund can impact their sponsoring firms. This is specifically applied to the Netherlands, investigating firms on the AEX and their Dutch pension plans, over the three fiscal years of 2014 to 2016. In order to achieve this, a model is made to test hypotheses linking aspects of the pension fund to the sponsoring firm. This study investigates four hypotheses, regarding pension fund coverage, sponsoring firm contribution, pension fund maturity, and pension plan type, on firm investment. Firm investment is used as an overall indicator of firm performance. Pension plan types were divided into three categories: mostly DB, hybrid, and mostly DC. None of the hypothesised relationships appeared to be supported by the data.
The data collection encountered one major issue, namely that for the majority of firms on the AEX, it appeared to not be possible to find out what their associated pension funds were. This lead to a relatively small number of firms, at 36 firms and 108 observations. Nevertheless the model was applied, investigating whether any significant relationships regarding the hypotheses can be found. This study has found that, with this data set, none of the hypotheses are supported. Using different versions of the model, excluding different variables, all produced similar results, not supporting the hypotheses.
This study finds that the dichotomous view of prior studies17, of only regarding DB pension plans, and regarding the rest as DC pension plans, does not represent the situation in the Netherlands. The data collected for this study shows that 42% of observations regard hybrid pension plans, that are neither DB nor DC. It is unknown to this study whether this is only the case in the Netherlands, and not abroad.
Recommendations
This thesis recommends further investigating the different pension plan types, in order to assess the role of hybrid pension plans on the whole situation.
Although not directly related to the research question of this thesis, this study has found that the leverage of a sponsoring firms seems to be affected by the pension plan type. Sponsoring firm with DC pension plans appear to have significantly higher leverage compared to DB or
17
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hybrid. Rauh (2009) investigated the relationship between the pension fund and the leverage of the sponsoring firm, but only with DB pension plans, disregarding other types. Taking the different pension plan types into account could create a more complete picture of the relationship between pension funds and sponsoring firms. The data used by this study implies such an effect. Therefore this thesis suggests further investigation of the relationship between pension plan types and sponsoring firm‟s leverage.
Adding to that, the recent trend of moving away from DB pension plans towards hybrid and DC pension plans would strengthen the need to investigate, in a broader context of different pension plan types, relationships between pension funds and sponsoring firms.
Limitations
The main limitation of this study was the link between firms and their pension funds. This link was not clear, and more often than not, no pension fund could be found that was associated with a specific firm. This lead to the original firm list having over 100 firms, while this study ended up using only 36. This is mainly due to the lack of clarity in the way sponsoring firms communicate about their pension funds. This also includes not being clear on how contribution is divided between multiple pension funds and discrepancies between how much an annual report states it contributed and how much the associated pension fund states it received in sponsoring contribution. This could only be investigated with firm specific pension funds, and was unnoticeable with industry wide pension funds.
When observing the rationale behind the third hypothesis, an extra relationship comes to mind. The hypothesis states that the increased risk of the pension fund (expressed by its maturity) impacts the costs and limits external financing options. If this is the case it can be argued that it also impacts the investment opportunities. This is because if the external financing becomes more constrained, investment opportunities become less profitable, and certain opportunities might become unprofitable anymore. This means that investment opportunities may exist which would have been profitable if the risk would have been lower. In other words, a higher risk would result in a higher cost of capital, which would in turn influence investment opportunities. As all results in this study have shown no significant relation between maturity and the sponsoring firm, this line of reasoning has not been explored further.
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Another factor to take into account when considering this study‟s universality. Many studies from outside of the Netherlands were used in order to form the research question and the hypotheses. All these studies were subjected to scrutiny to determine whether or not these were applicable to the Dutch situation. If not these studies were omitted. An example of this would be a study taking place in the U.S.A. only regarding pension funds that were insured with the Pension Benefit Guarantee Corporation. As this is not possible in the Netherlands that study would not be very relevant to this one. The issue with this approach is that it is not always clear when a study is, or is not, applicable and should be omitted. Multiple studies use the U.S.A. as an example without explicitly mentioning such differences. It appears that overall pension funds in the U.S.A. take more risk than their Canadian and European counterparts (Andonov, Bauer, & Cremers, 2017). This could be explained by the ability to insure the pensions as mentioned before. It could mean that the studies done in the U.S.A., especially on the subject of pension fund risk, are not or less relevant for studies done outside of the U.S.A.
What has been noted is that the real coverage was not available for most pension funds prior to 2014. One issue encountered with the nominal coverage value was that it was not always clear whether the value presented was the average nominal value for a year, or the nominal value at the end of a year. The year average nominal coverage is desired by this study as it is deemed more representative of the situation on a yearly bases, which is what is investigated by this study. It also happened that only the nominal value for the end of the year was given and not the average for the year, in those cases this end year value was used and deemed to be an acceptable replacement for the year average value. The differences between year average and year end nominal values was not extensively explored in this study. Empirical data shows that the non-average nominal coverage value can vary greatly over the course of a year. For example, the pension fund for Heineken has varied over the year 2016 between 92.5% in February and 104.6% in December (Stichting Heineken Pensioenfonds, 2016). Continuing with this example, the year average nominal coverage for 2016 was 95.7%, while the year- end nominal coverage was 104.6%. This implies that the difference between year average and year end could be significant.
In order to get a value for the variable maturity, the number of beneficiaries is divided by the total number of participants. It is important to note that this means that no differentiation has been made between active participants and non-active participants. This was based upon the work of Andonov, Bauer & Cremers (2017). The result is that, in the variable maturity, no
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difference is made between these two types of participants. In practice this means that an increase of non-active participants reduces the value of maturity, while a decrease in non- active participants leads to an increase in the value of maturity. While in the work of Andonov, Bauer & Cremers (2017), maturity is measured as “the percentage of retired members from total pension fund members”, non-active participants are not mentioned. It may be the case that this group does not represent a significant portion of participants in that study (done with firm of the U.S.A.). However in the data set used by this study, the group of non-active participants seems significant, as it can sometimes be larger than either the retired or the active participants.
The pension plan types, as a variable, represents the amount of responsibility a firm has. This however proved to be more complicated than expected. The system of deciding the type of plan purely based on DB, DC or other variants may be too limited. The cause of this is because multiple firms have a DB pension plan for their employees, which is housed with a larger pension fund, such as an industry wide pension fund. Different annual reports indicate that because this pension fund is unable to indicate the specific responsibility of each individual sponsoring firm, each sponsoring firm handles the pension plan as if it were DC. The possibility exists that if such an industry wide pension fund were in financial trouble, all the sponsoring firms would be held responsible. Therefore, encountered cases where this happened have still been deemed to be a DB pension plan. However, it is important to note that even if a sponsoring firm has a DB pension plan, they do not always handle the responsibility in the same way. This could be further investigated in the future.
Finally, another issue encountered is whether the used pension funds are actually representative for the pension burden carried by a sponsoring firm. This mostly regards the larger international firms, because they often have employees and pension obligations outside of the Netherlands. In such cases, the total firm contribution is used as contribution, this as it represents the yearly financial commitment to the pensions. All other pension fund related variables only regard their Dutch pension fund(s). An example is Royal Dutch Shell, of which their contributions to their Dutch pension fund only represents 17% of their total contributions (over the years 2014 to 201618). If the Dutch pensions only represent 17% of their pension burden it may not be valid to assume that the other aspects of Dutch pension funds (such as coverage and maturity) are representative for the whole pension burden. An
18
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idea on the way to handle this issue would be to have a clear requirement for firms on how much of the pension burden must be in the Netherlands in order to qualify for the study.
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