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Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans

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  • J. Michael Harrison
  • William F. Sharpe

Abstract

This paper considers a world in which pension funds may default, the cost of the associated risk of default is not borne fully by the sponsoring corporation, and there are differential tax effects. The focus is on ways in which the wealth of the shareholders of a corporation sponsoring a pension plan might be increased if the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) follow simple and naive policies. Under the conditions examined, the optimal policy for pension plan funding and asset allocation is shown to be extremal in a certain sense. This suggests that the IRS and the PBGC may wish to use more complex regulatory procedures than those considered in the paper.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0935.

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Date of creation: Jul 1982
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Publication status: published as Harrison, J. Michael and William F. Sharpe. "Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans." Financial Aspects of the U .S. Pension System, edited by Zvi Bodie and John B. Shoven. Chicago: UCP, (1983), pp. 91-106.
Handle: RePEc:nbr:nberwo:0935

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  1. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
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Cited by:
  1. Kalra, Raman & Jain, Gautam, 1997. "A continuous-time model to determine the intervention policy for PBGC," Journal of Banking & Finance, Elsevier, vol. 21(8), pages 1159-1177, August.
  2. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
  3. Chongmin Kim, 2004. "Corporate financial policy with pension accounts: an extension of the Modigliani-Miller theorem," International Economic Journal, Taylor & Francis Journals, vol. 18(2), pages 215-236.
  4. 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.
  5. David A. Love & Paul A. Smith & David Wilcox, 2007. "Why do firms offer risky defined benefit pension plans?," Finance and Economics Discussion Series 2007-36, Board of Governors of the Federal Reserve System (U.S.).
  6. Zvi Bodie & Jay O.. Light & Randall Morck, 1987. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Chapters, in: Issues in Pension Economics, pages 15-48 National Bureau of Economic Research, Inc.
  7. Alan Marcus, 1987. "Corporate Pension Policy and the Value of PBGC Insurance," NBER Chapters, in: Issues in Pension Economics, pages 49-80 National Bureau of Economic Research, Inc.
  8. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.
  9. 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.).
  10. Zvi Bodie, 1988. "Pension Fund Investment Policy," NBER Working Papers 2752, National Bureau of Economic Research, Inc.
  11. Steenkamp, Tom B.M. van, 1999. "Contingent claims analysis and the valuation of pension liabilities," Serie Research Memoranda 0019, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.

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