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Who Owns the Assets in a Defined Benefit Pension Plan

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  • Jeremy I. Bulow
  • Myron S. Scholes

Abstract

The liability to employees in a defined benefit pension plan is the present value of vested benefits, the present value of the benefits that employees would receive on the immediate termination of the pension plan. This is the literal and simple definition of the liability. Although it leads to an understanding of the economics of the promise of a pension, several common provisions of pension plans make it necessary to expand the definition. Anomalies such as vesting, early retirement benefits, lump sum provisions, and ad hoc increases in benefits for retired employees indicate that employees accrue benefits that exceed their benefits on a termination of the plan. These anomalies, however, can be explained by requiring that employees as a group possess specific human capital. Although losing one or a few employees from the group would be a small loss, losing the group of employees would be a great loss. In this group model, employees bargain with the stockholders over the compensation of the entire group; they allocate . their compensation according to marginal product, returns from previous equity investments in the human capital of the group, and to purchases and sales of claims on this capital. The model explains the anomalies as a natural outgrowth of the transactions of members within the group. In addition, the model explains the use of defined benefit pension plans, and how employees could have claims, in excess of vested benefits, on the assets in the pension plan.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0924.

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Date of creation: Jul 1982
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Publication status: published as Jeremy I. Bulow, Myron S. Scholes. "Who Owns the Assets in a Defined-Benefit Pension Plan?," in Zvi Bodie and John B. Shoven, editors, "Financial Aspects of the United States Pension System" University of Chicago Press (1983)
Handle: RePEc:nbr:nberwo:0924

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Cited by:
  1. James E. Pesando, 1986. "Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists," NBER Working Papers 1795, National Bureau of Economic Research, Inc.
  2. David McCarthy, 2003. "A Lifecycle Analysis of Defined Benefit Pension Plans," Working Papers wp053, University of Michigan, Michigan Retirement Research Center.
  3. Benjamin M. Friedman, 1996. "Economic Implications of Changing Share Ownership," NBER Working Papers 5141, National Bureau of Economic Research, Inc.
  4. Kenneth Trager & James Francis & Kevin SigRist, . "Florida's Public Pension Reform Debate: A Discussion of the Issues and Estimates of the Option Costs," Pension Research Council Working Papers 99-23, Wharton School Pension Research Council, University of Pennsylvania.
  5. An, Heng & Huang, Zhaodan & Zhang, Ting, 2013. "What determines corporate pension fund risk-taking strategy?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 597-613.
  6. Alan J. Auerbach, 2005. "Who Bears the Corporate Tax? A review of What We Know," NBER Working Papers 11686, National Bureau of Economic Research, Inc.
  7. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.
  8. Love, David A. & Smith, Paul A. & Wilcox, David W., 2011. "The effect of regulation on optimal corporate pension risk," Journal of Financial Economics, Elsevier, vol. 101(1), pages 18-35, July.
  9. Jeffrey R. Brown, 2008. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 177-198, Winter.

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