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The value of Pension Benefit Guaranty Corporation insurance

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  • George Pennacchi
  • Christopher M. Lewis

Abstract

This paper considers the cost of Pension Benefit Guaranty Corporation (PBGC) insurance for single-employer defined benefit pension plans. It derives a formula for the PBGC's liability that explicitly recognizes the two necessary conditions that must arise for the PBGC to sustain a loss. First, the corporation sponsoring the pension Iund must undergo bankruptcy and, second, this pension plan must be underfunded. The PBGC's liability is valued as a contingent put option and expressed as infinite series of modified Bessel functions. The comparative statics of the model are examined and are quite consistent with economic intuition. Copyright 1994 by Ohio State University Press.
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Suggested Citation

  • George Pennacchi & Christopher M. Lewis, 1994. "The value of Pension Benefit Guaranty Corporation insurance," Proceedings, Federal Reserve Bank of Cleveland, pages 735-756.
  • Handle: RePEc:fip:fedcpr:y:1994:p:735-756
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    Cited by:

    1. Wolfgang Gerke & Ferdinand Mager & Timo Reinschmidt & Christian Schmieder, 2008. "Empirical Risk Analysis of Pension Insurance: The Case of Germany," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(3), pages 763-784.
    2. Joseph G. Haubrich & James B. Thomson, 1994. "A conference on federal credit allocation," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
    3. Chao-Liang Chen, 2005. "The funding for a Defined Benefit (DB) pension plan based on the fair valuation of the plan's insolvency risk," Applied Economics, Taylor & Francis Journals, vol. 37(14), pages 1623-1633.
    4. Cotter, John & Blake, David & Dowd, Kevin, 2006. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," MPRA Paper 3498, University Library of Munich, Germany.
    5. David A. Love & Paul A. Smith & David W. 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.).
    6. Pennacchi & Pennacchi, George, 1998. "Government guarantees on pension fund returns," Social Protection and Labor Policy and Technical Notes 20049, The World Bank.
    7. Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
    8. Chen, An & Uzelac, Filip, 2014. "A risk-based premium: What does it mean for DB plan sponsors?," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 1-11.
    9. Stavros Panageas, 2009. "Optimal taxation in the presence of bailouts," NBER Working Papers 15405, National Bureau of Economic Research, Inc.
    10. Stavros Panageas, 2009. "Bailouts, the Incentive to Manage Risk, and Financial Crises," NBER Working Papers 15058, National Bureau of Economic Research, Inc.
    11. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Pension Benefit Guaranty Corporation;

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