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

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Author Info
J. Michael Harrison
William F. Sharpe

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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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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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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. [Downloadable!] (restricted)
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  1. 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.). [Downloadable!]
  2. Zvi Bodie, 1991. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Zvi Bodie, 1988. "Pension Fund Investment Policy," NBER Working Papers 2752, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
  5. Chongmin Kim, 2004. "Corporate financial policy with pension accounts: an extension of the Modigliani-Miller theorem," International Economic Journal, Korean International Economic Association, vol. 18(2), pages 215-236, June. [Downloadable!] (restricted)
  6. Zvi Bodie & Jay O. Light & Randall Morck & Robert A. Taggart, Jr., 1986. "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Working Papers 1315, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. 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.). [Downloadable!]
    Other versions:
  8. Alan J. Marcus, 1983. "Corporate Pension Policy and the Value of PBGC Insurance," NBER Working Papers 1217, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
    Other versions:
  10. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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