Unfunded pension liabilities and sponsoring firm credit risk: an international analysis of corporate bond spreads

This paper tests empirically whether pension information derived by corporate pension accounting disclosures is priced in corporate bond spreads. The model represents a hybrid of more traditional accounting ratio-based models of credit risk and structural models of bond spreads initiated by Merton (1974). The model is fitted to 5 years of data from 2002 to 2006 featuring companies from the US and Europe. The paper finds that while unfunded pension liabilities are priced in the overall sample, they are not priced as aggressively as traditional leverage. Furthermore, an extended model shows that the pension–credit risk relation is most evident in the US and Germany, where unfunded pension liabilities are priced more aggressively than traditional forms of leverage. No pension–credit risk relation is found in the other countries sampled, notably the UK, Netherlands and France.

Unfunded Pension Liabilities and the Corporate CDS Market

This article examines the impact of pension deficits on default risk as measured by the premia on corporate credit default swaps (CDS). We find highly significant evidence that unfunded pension liabilities raise one- and five-year CDS premia. However, this relation is not homogeneous across countries, with the U.S. CDS market leading its European counterparts in the pricing of defined-benefit pension risk.