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

  • Besley, Timothy J.
  • Prat, Andrea

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3955.

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Date of creation: Jun 2003
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Handle: RePEc:cpr:ceprdp:3955
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  1. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
  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. Andrea Prat, 2004. "The wrong kind of transparency," LSE Research Online Documents on Economics 24712, London School of Economics and Political Science, LSE Library.
  4. Diane Del Guercio & Paula A. Tkac, 2000. "The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds," Working Paper 2000-21, Federal Reserve Bank of Atlanta.
  5. 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.
  6. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  7. 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.
  8. Venkiteswaran N, . "Ethics, Values and Corporate Governance," IIMA Working Papers WP1997-08-01_01459, Indian Institute of Management Ahmedabad, Research and Publication Department.
  9. Venkiteswaran N, . "Corporate Governance for Shareholder Value," IIMA Working Papers WP2000-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
  10. Petersen, Mitchell A, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1033-56, August.
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