Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans
This paper considers a world in which pension funds may default, the cost of the associated risk of default is not borne fully by the sponsoring corporation, and there are differential tax effects. The focus is on ways in which the wealth of the shareholders of a corporation sponsoring a pension plan might be increased if the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) follow simple and naive policies. Under the conditions examined, the optimal policy for pension plan funding and asset allocation is shown to be extremal in a certain sense. This suggests that the IRS and the PBGC may wish to use more complex regulatory procedures than those considered in the paper.
|Date of creation:||Jul 1982|
|Date of revision:|
|Publication status:||published as Harrison, J. Michael and William F. Sharpe. "Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans." Financial Aspects of the U .S. Pension System, edited by Zvi Bodie and John B. Shoven. Chicago: UCP, (1983), pp. 91-106.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Litzenberger, Robert H & Van Horne, James C, 1978. "Elimination of the Double Taxation of Dividends and Corporate Financial Policy," Journal of Finance, American Finance Association, vol. 33(3), pages 737-50, June.
- Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
- Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
- Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
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