(UBS Pensions Series 032) Pension Plan Funding, Risk Sharing and Technology Choice

The paper presents an analysis of the impact of pension plan funding on workers’ saving and portfolio behaviour. It shows that the impact of pension plan funding and asset allocation on the economy’s technology choices depends upon the constraints facing worker’s in the capital market. The failure of equivalence propositions between defined benefit and defined contribution pension plans derives from the existence of borrowing and short-sales constraints. We investigate how firms’ capital structure choices interact with pension plan funding, both when corporate debt is riskless and risky. We make predictions about how, in the presence of leverage, the benefit level and financing of the pension plan affects technology choices and aggregate risk premia. The impact of leverage on these variables is shown to be reversed if if non fully-funded pensions themselves are put at sufficient risk. Please note that this is a new version of the DP