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Pension Benefit Insurance and Pension Plan Portfolio Choice

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Author Info
Thomas Crossley () (University of Cambridge, London)
Mario Jametti () (York University, Toronto Canada)

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Abstract

Pension benefit guarantee policies have been introduced in several countries to protect private pension plan members from the loss of income that would occur if a plan was underfunded when the sponsoring firm terminates a plan. Most of these public insurance schemes face financial difficulty and consequently policy reforms are being discussed or implemented. Economic theory suggests that such schemes will face moral hazard and adverse selection problems. In this note we test a specific theoretical prediction: insured plans will invest more heavily in risky assets. Our test exploits differences in insurance arrangements across Canadian jurisdictions. We find that insured plans invest about 5 percent more in equities than do similar plans without benefit guarantees.

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2008/Pensions811c.pdf
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Publisher Info
Paper provided by York University, Department of Economics in its series Working Papers with number 2008_05.

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Length: 12 pages
Date of creation: Nov 2008
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Handle: RePEc:yca:wpaper:2008_05

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Related research
Keywords: Pensions; benefit guarantee; moral hazard;

Other versions of this item:

Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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References listed on IDEAS
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  1. Nielson, Norma L. & Chan, David K. W., 2007. "Private pensions and government guarantees: clues from Canada," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(01), pages 45-66, March. [Downloadable!]
  2. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June. [Downloadable!] (restricted)
  3. Cummins, J David & Outreville, J Francois, 1984. "The Portfolio Behaviour of Pension Funds in the U.S.: An Econometric Analysis of Changes since the New Regulation of 1974," Applied Economics, Taylor and Francis Journals, vol. 16(5), pages 687-701, October.
  4. David W. Wilcox, 2006. "Reforming the Defined-Benefit Pension System," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2006-1), pages 235-304. [Downloadable!]
  5. Stephen G Donald & Kevin Lang, 2007. "Inference with Difference-in-Differences and Other Panel Data," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 221-233, 03. [Downloadable!] (restricted)
  6. Michael Baker & Kevin Milligan, 2008. "Evidence From Maternity Leave Expansions of the Impact of Maternal Care on Early Child Development," NBER Working Papers 13826, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-38, May. [Downloadable!] (restricted)
  8. 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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  9. Mario Jametti, 2008. "Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance: An Overview of Theory and Evidence," Canadian Public Policy, University of Toronto Press, vol. 34(s1), pages 39-46, November. [Downloadable!] (restricted)
  10. Cooper, Russell W. & Ross, Thomas W., 2003. "Protecting underfunded pensions: the role of guarantee funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(03), pages 247-272, November. [Downloadable!]
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