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Who Owns the Assets in a Defined Benefit Pension Plan

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  • Jeremy I. Bulow
  • Myron S. Scholes

Abstract

The liability to employees in a defined benefit pension plan is the present value of vested benefits, the present value of the benefits that employees would receive on the immediate termination of the pension plan. This is the literal and simple definition of the liability. Although it leads to an understanding of the economics of the promise of a pension, several common provisions of pension plans make it necessary to expand the definition. Anomalies such as vesting, early retirement benefits, lump sum provisions, and ad hoc increases in benefits for retired employees indicate that employees accrue benefits that exceed their benefits on a termination of the plan. These anomalies, however, can be explained by requiring that employees as a group possess specific human capital. Although losing one or a few employees from the group would be a small loss, losing the group of employees would be a great loss. In this group model, employees bargain with the stockholders over the compensation of the entire group; they allocate . their compensation according to marginal product, returns from previous equity investments in the human capital of the group, and to purchases and sales of claims on this capital. The model explains the anomalies as a natural outgrowth of the transactions of members within the group. In addition, the model explains the use of defined benefit pension plans, and how employees could have claims, in excess of vested benefits, on the assets in the pension plan.

Suggested Citation

  • Jeremy I. Bulow & Myron S. Scholes, 1982. "Who Owns the Assets in a Defined Benefit Pension Plan," NBER Working Papers 0924, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0924
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    References listed on IDEAS

    as
    1. Jeremy I. Bulow, 1979. "Analysis of Pension Funding Under Erisa," NBER Working Papers 0402, National Bureau of Economic Research, Inc.
    2. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
    3. Arnott, Richard J. & Gersovitz, Mark, 1980. "Corporate financial structure and the funding of private pension plans," Journal of Public Economics, Elsevier, vol. 13(2), pages 231-247, April.
    4. Treynor, Jack L, 1977. "The Principles of Corporate Pension Finance," Journal of Finance, American Finance Association, vol. 32(2), pages 627-638, May.
    5. Tepper, Irwin & Affleck, A R P, 1974. "Pension Plan Liabilities and Corporate Financial Strategies," Journal of Finance, American Finance Association, vol. 29(5), pages 1549-1564, December.
    6. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
    7. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    8. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
    9. Feldstein, Martin & Seligman, Stephanie, 1981. "Pension Funding, Share Prices, and National Savings," Journal of Finance, American Finance Association, vol. 36(4), pages 801-824, September.
    10. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
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    Cited by:

    1. Jeffrey R. Brown, 2008. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 177-198, Winter.
    2. repec:eee:labchp:v:1:y:1986:i:c:p:305-355 is not listed on IDEAS
    3. Alan J. Auerbach, 2006. "Who Bears the Corporate Tax? A Review of What We Know," NBER Chapters,in: Tax Policy and the Economy, Volume 20, pages 1-40 National Bureau of Economic Research, Inc.
    4. Benjamin M. Friedman, 1995. "Economic Implications of Changing Share Ownership," NBER Working Papers 5141, National Bureau of Economic Research, Inc.
    5. Kenneth Trager & James Francis & Kevin SigRist, "undated". "Florida's Public Pension Reform Debate: A Discussion of the Issues and Estimates of the Option Costs," Pension Research Council Working Papers 99-23, Wharton School Pension Research Council, University of Pennsylvania.
    6. 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.
    7. David McCarthy, 2003. "A Lifecycle Analysis of Defined Benefit Pension Plans," Working Papers wp053, University of Michigan, Michigan Retirement Research Center.
    8. An, Heng & Huang, Zhaodan & Zhang, Ting, 2013. "What determines corporate pension fund risk-taking strategy?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 597-613.
    9. Love, David A. & Smith, Paul A. & Wilcox, David W., 2011. "The effect of regulation on optimal corporate pension risk," Journal of Financial Economics, Elsevier, vol. 101(1), pages 18-35, July.
    10. Pesando, James E, 1987. "Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 215-238, April.
    11. 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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