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(UBS Pensions series 12) Pension Fund Governance and the Choice Between Defined Benefit and Defined Contribution Plans

Listed author(s):
  • Andrea Prat

Recent events in several countries have underscored the importance of good governance in private occupational pension plans. The present paper uses contract theory to analyze 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 di.er 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 tothe sponsor (beneficiaries); (5) have strict funding requirements.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp454.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp454.

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Date of creation: Jun 2003
Handle: RePEc:fmg:fmgdps:dp454
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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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. 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.
  3. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
  4. Venkiteswaran N, 1997. "Ethics, Values and Corporate Governance," IIMA Working Papers WP1997-08-01_01459, Indian Institute of Management Ahmedabad, Research and Publication Department.
  5. 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.
  6. 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.
  7. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
  8. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  9. 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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