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Pension Fund Governance and the Choice Between Defined Benefit and Defined Contribution Plans

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  • Besley, Timothy J.
  • Prat, Andrea

Abstract

Recent events in several countries have underscored the importance of good governance in private occupational pension plans. The present Paper uses contract theory to analyse the interplay of residual claims and control rights in private pensions. The residual claimant is the plan sponsor in a defined benefit (DB) plan and the pool of beneficiaries in a defined contribution (DC) plan. The main control rights we examine relate to decisions on funding, asset allocation, and asset management. Under complete contracting, governance can be shown to be neutral: DC and DB plans differ only on risk allocation. If instead contracts are incomplete, a DB (DC) plan should: (1) Assign more vigilance responsibility to the sponsor (beneficiaries); (2) Rely less (more) on trustees; (3) Tend to employ trustees that are professional experts (caring insiders); (4) Assign asset allocation rights to the sponsor (beneficiaries); (5) have strict funding requirements.

Suggested Citation

  • Besley, Timothy J. & Prat, Andrea, 2003. "Pension Fund Governance and the Choice Between Defined Benefit and Defined Contribution Plans," CEPR Discussion Papers 3955, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3955
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    References listed on IDEAS

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    1. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
    2. Lakonishok, Joseph & Shleifer, Andrei & Vishny, Robert W., 1992. "The Structure and Performance of the Money Management Industry," Scholarly Articles 10498059, Harvard University Department of Economics.
    3. Diane Del Guercio & Paula A. Tkac, 2000. "The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds," FRB Atlanta Working Paper 2000-21, Federal Reserve Bank of Atlanta.
    4. Andrew A. Samwick & Jonathan Skinner, 1998. "How Will Defined Contribution Pension Plans Affect Retirement Income?," NBER Working Papers 6645, National Bureau of Economic Research, Inc.
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    6. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
    7. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
    8. Venkiteswaran N, 1997. "Ethics, Values and Corporate Governance," IIMA Working Papers WP1997-08-01_01459, Indian Institute of Management Ahmedabad, Research and Publication Department.
    9. Venkiteswaran N, 2000. "Corporate Governance for Shareholder Value," IIMA Working Papers WP2000-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    10. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
    11. Blake, David, 1998. "Pension schemes as options on pension fund assets: implications for pension fund management," Insurance: Mathematics and Economics, Elsevier, vol. 23(3), pages 263-286, December.
    12. Mitchell A. Petersen, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 1033-1056.
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    Citations

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    Cited by:

    1. Anne Lavigne, 2006. "Gouvernance et investissement des fonds de pension privés aux Etats-Unis," Working Papers halshs-00081401, HAL.
    2. Stefan W. Schmitz, 2005. "Die Governance-Struktur der Pensionskassen in Österreich und ihre politökonomischen Konsequenzen," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 31(3), pages 407-443.
    3. Thomas Steinberger, 2005. "Pension benefit default risk and welfare effects of funding regulation," CSEF Working Papers 147, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    4. Siegmann, Arjen, 2011. "Minimum funding ratios for defined-benefit pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(03), pages 417-434, July.
    5. Luciano Greco, 2005. "The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment," "Marco Fanno" Working Papers 0003, Dipartimento di Scienze Economiche "Marco Fanno".
    6. repec:eee:accfor:v:38:y:2014:i:1:p:18-37 is not listed on IDEAS
    7. Jackowicz, Krzysztof & Kowalewski, Oskar, 2012. "Crisis, internal governance mechanisms and pension fund performance: Evidence from Poland," Emerging Markets Review, Elsevier, vol. 13(4), pages 493-515.
    8. Cocco, Joâo Francisco P.D. & Volpin, Paolo, 2005. "The Corporate Governance of Defined-Benefit Pension Plans: Evidence from the United Kingdom," CEPR Discussion Papers 4932, C.E.P.R. Discussion Papers.
    9. Hess, David & Impavido, Gregorio, 2003. "Governance of public pension funds : lessons from corporate governance and international evidence," Policy Research Working Paper Series 3110, The World Bank.
    10. repec:aia:aiaswp:wp99 is not listed on IDEAS

    More about this item

    Keywords

    governance; pension fund; private pension;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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