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Financial Risks and the Pension Protection Fund: Can it Survive Them?

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  • David Blake
  • John Cotter
  • Kevin Dowd

Abstract

This paper discusses the financial risks faced by the UK Pension Protection Fund (PPF) and what, if anything, it can do about them. It draws lessons from the regulatory regimes under which other financial institutions, such as banks and insurance companies, operate and asks why pension funds are treated differently. It also reviews the experience with other government-sponsored insurance schemes, such as the US Pension Benefit Guaranty Corporation, upon which the PPF is modelled. We conclude that the PPF will live under the permanent risk of insolvency as a consequence of the moral hazard, adverse selection, and, especially, systemic risks that it faces.

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File URL: http://arxiv.org/pdf/1103.5978
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Paper provided by arXiv.org in its series Papers with number 1103.5978.

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Date of creation: Mar 2011
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Handle: RePEc:arx:papers:1103.5978

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  1. Langetieg, T. C. & Findlay, M. C. & da Motta, L. F. J., 1982. "Multiperiod Pension Plans and ERISA," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(04), pages 603-631, November.
  2. Treynor, Jack L, 1977. "The Principles of Corporate Pension Finance," Journal of Finance, American Finance Association, vol. 32(2), pages 627-38, May.
  3. Alan J. Marcus, 1983. "Corporate Pension Policy and the Value of PBGC Insurance," NBER Working Papers 1217, National Bureau of Economic Research, Inc.
  4. David McCarthy & Anthony Neuberger, 2005. "Pricing pension insurance: the proposed levy structure for the Pension Protection Fund," Fiscal Studies, Institute for Fiscal Studies, vol. 26(4), pages 471-489, December.
  5. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
  6. Kevin Dowd & David Blake, 2006. "After VaR: The Theory, Estimation, and Insurance Applications of Quantile-Based Risk Measures," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 193-229.
  7. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  8. Patricia Jackson & David Maude & William Perraudin, 1998. "Bank Capital and Value at Risk," Bank of England working papers 79, Bank of England.
  9. Pennacchi, George G & Lewis, Christopher M, 1994. "The Value of Pension Benefit Guaranty Corporation Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(3), pages 735-53, August.
  10. Herring, Richard J, 1999. "Credit Risk and Financial Instability," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 63-79, Autumn.
  11. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, Ekim.
  12. David McCarthy & Anthony Neuberger, 2005. "The Pension Protection Fund," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 139-167, June.
  13. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  14. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(2), pages 399-441, May.
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Cited by:
  1. John Cotter & David Blake & Kevin Dowd, 2012. "What Should Be Done About The Underfunding of Defined Benefit Pension Schemes?," Working Papers, Geary Institute, University College Dublin 201202, Geary Institute, University College Dublin.

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