Pension Fund Governance and the Choice Between Defined Benefit and Defined Contribution Plans
AbstractRecent events in several countries have underscored the importance of good governance in private occupational pension plans. The present Paper uses contract theory to analyse the interplay of residual claims and control rights in private pensions. The residual claimant is the plan sponsor in a defined benefit (DB) plan and the pool of beneficiaries in a defined contribution (DC) plan. The main control rights we examine relate to decisions on funding, asset allocation, and asset management. Under complete contracting, governance can be shown to be neutral: DC and DB plans differ only on risk allocation. If instead contracts are incomplete, a DB (DC) plan should: (1) Assign more vigilance responsibility to the sponsor (beneficiaries); (2) Rely less (more) on trustees; (3) Tend to employ trustees that are professional experts (caring insiders); (4) Assign asset allocation rights to the sponsor (beneficiaries); (5) have strict funding requirements.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3955.
Date of creation: Jun 2003
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Other versions of this item:
- Tim Besley & Andrea Prat, 2003. "Pension fund governance and the choice between defined benefit and defined contribution plans," IFS Working Papers W03/09, Institute for Fiscal Studies.
- Timothy Besley & Andrea Prat, 2003. "Pension fund governance and the choice between defined benefit and defined contribution plans," LSE Research Online Documents on Economics 24853, London School of Economics and Political Science, LSE Library.
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
This paper has been announced in the following NEP Reports:
- NEP-CFN-2003-07-21 (Corporate Finance)
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