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Corporate Pension Policy and the Value of PBGC Insurance

In: Issues in Pension Economics

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  • Alan Marcus

Abstract

This paper derives the value of PBGC pension insurance under two scenarios of interest. The first allows for voluntary plan termination, which appears to be legal under current statutes. In the second scenario, termination is prohibited unless the firm is bankrupt. Optimal pension funding strategy under each scenario is examined. Finally,empirical estimates of PBGC liabilities are calculated. These show that a small number of funds account for a large fraction of total prospective PBGC liabilities, that those total liabilities greatly exceed current PBGC reserves for plan terminations, and that PBGC liabilities could be substantially reduced by the prohibition of voluntary termination.
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Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberch:6853
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    Cited by:

    1. Dirk Broeders & An Chen, 2013. "Pension Benefit Security: A Comparison of Solvency Requirements, a Pension Guarantee Fund, and Sponsor Support," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 239-272, June.
    2. Joseph G. Haubrich & James B. Thomson, 1994. "A conference on federal credit allocation," Economic Review, Federal Reserve Bank of Cleveland, vol. 30(Q III), pages 2-13.
    3. Qian, Linyi & Shen, Yang & Wang, Wei & Yang, Zhixin, 2019. "Valuation of risk-based premium of DB pension plan with terminations," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 51-63.
    4. John Cotter & David Blake & Kevin Dowd, 2012. "What Should Be Done About The Underfunding of Defined Benefit Pension Schemes?," Working Papers 201202, Geary Institute, University College Dublin.
    5. 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.
    6. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162, National Bureau of Economic Research, Inc.
    7. Michaelides, Alexander & Milidonis, Andreas & Papakyriakou, Panayiotis, 2019. "Corporate Pension Plan Funding Levels and Pension Assumptions," CEPR Discussion Papers 13591, C.E.P.R. Discussion Papers.
    8. Móricz, Dániel, 2004. "Vállalati szolgáltatási nyugdíjprogramok optimális befektetési politikája és fedezettségi szintje az Egyesült Államokban [Optimal investment and funding policy of US defined-benefit pension plans]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1113-1131.
    9. Romaniuk, Katarzyna, 2019. "Premiums of the Pension Benefit Guarantee Corporation and risk-taking by pension plans," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 301-307.
    10. Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
    11. Kent Smetters, 2001. "The Effect of Pay-When-Needed Benefit Guarantees on the Impact of Social Security Privatization," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 91-112, National Bureau of Economic Research, Inc.
    12. 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.
    13. 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.
    14. Smetters, Kent, 2002. "Controlling the cost of minimum benefit guarantees in public pension conversions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(1), pages 9-33, March.
    15. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.

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