The influence of unfunded pension liabilities as a potential risk of financial distress

Abstract

This thesis investigates the influence of unfunded pension liabilities on the probability of default for corporations. By employing empirical models like the Altman Z- & Z''-Score and the Ohlson O-Score, the study assesses the effects of unfunded pension liabilities on the probability of default among U.S. corporations listed in the S&P 500 from 2006 to 2022. This period is significant due to the implementation of the Pension Protection Act in 2006, which mandated companies to fully fund their pension obligations within a shortened timeframe. The research methodology includes a fixed-effects regression model with variables indicative of pension management to analyse the impact on corporate default risk. The thesis presents a comprehensive review of corporate pension schemes' history, the Pension Protection Act's regulatory context, and the empirical models employed. The analysis distinguishes the varying impacts of unfunded pension liabilities on the probability of default across industries, providing new insights into this under-researched area. Key findings suggest that while unfunded pension liabilities significantly influence the probability of default in some industries, their overall impact across the broad spectrum of industries is nuanced and varies depending on specific industry characteristics, the viewed model, and financial practices. The study contributes to the existing literature by highlighting the complex relationship between pension liabilities and corporate financial health, offering both theoretical and practical implications for managing financial distress risk in corporations.

Date of Award	8 May 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Reis (Supervisor)