An Analysis of Debt and Equity Market Reaction to Pension Risk Transfer Announcements: What Investors Need to Know

Abstract

The pension annuity buyout market continues to experience very strong growth, with record deal volumes being reported. Cantor, Hood, and Power (2017) document a large variation in stock market reaction to annuity buyout announcements. The fundamental question remains however: Does the equity market care about these transactions? In Cantor, Hood, and Power (2018), we hope to further understand the market’s view of pension annuity buyout transactions. We argue that the funded status of the pension fund and the motivation for the buyout could drive the market’s reaction. By expanding our sample and gathering data on funded status, we can test the market’s reaction based on the funded status of the plan prior to the announcement. In addition, we examine the credit market’s reaction to the buyouts. We argue that the equity and debt markets may have a different reaction to the news, conditional on the funded status and credit quality of the company. Our research has important implications for plan sponsors considering whether a pension annuity buyout is an effective transaction. Moreover, our research is relevant for investors who are trying to interpret the impact of these transactions on a company’s value.

TOPICS: Pension funds, equity portfolio management, security analysis and valuation