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The Value of Pension Benefit Guaranty Corporation Insurance

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Author Info

  • Pennacchi, George G
  • Lewis, Christopher M

Abstract

This paper considers the cost of Pension Benefit Guaranty Corporation (PBGC) insurance for single-employer defined benefit pension plans. It derives a formula for the PBGC's liability that explicitly recognizes the two necessary conditions that must arise for the PBGC to sustain a loss. First, the corporation sponsoring the pension Iund must undergo bankruptcy and, second, this pension plan must be underfunded. The PBGC's liability is valued as a contingent put option and expressed as infinite series of modified Bessel functions. The comparative statics of the model are examined and are quite consistent with economic intuition. Copyright 1994 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 3 (August)
Pages: 735-53

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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:3:p:735-53

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Chao-Liang Chen, 2005. "The funding for a Defined Benefit (DB) pension plan based on the fair valuation of the plan's insolvency risk," Applied Economics, Taylor & Francis Journals, vol. 37(14), pages 1623-1633.
  2. Cotter, John & Blake, David & Dowd, Kevin, 2006. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," MPRA Paper 3498, University Library of Munich, Germany.
  3. Joseph G. Haubrich & James B. Thomson, 1994. "A conference on federal credit allocation," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
  4. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.
  5. Stavros Panageas, 2009. "Optimal taxation in the presence of bailouts," NBER Working Papers 15405, National Bureau of Economic Research, Inc.
  6. Chen, An & Uzelac, Filip, 2014. "A risk-based premium: What does it mean for DB plan sponsors?," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 1-11.
  7. David A. Love & Paul A. Smith & David Wilcox, 2009. "Should risky firms offer risk-free DB pensions?," Finance and Economics Discussion Series 2009-20, Board of Governors of the Federal Reserve System (U.S.).
  8. Pennacchi & Pennacchi, George, 1998. "Government guarantees on pension fund returns," Social Protection Discussion Papers 20049, The World Bank.
  9. Stavros Panageas, 2009. "Bailouts, the Incentive to Manage Risk, and Financial Crises," NBER Working Papers 15058, National Bureau of Economic Research, Inc.

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