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What Should Be Done About The Underfunding of Defined Benefit Pension Schemes?

Author

Listed:
  • John Cotter

    (University College Dublin)

  • David Blake

    (University of London)

  • Kevin Dowd

    (University of Notingham)

Abstract

Underfunding of defined benefit (DB) pension schemes is prevalent throughout the Western world, and no more so than Ireland. This paper examines underfunding of DB schemes and discusses alternative ways of overcoming this problem. It critically reviews alternative government sponsored insurance schemes including the US Pension Benefit Guaranty Corporation (PBGC) and the UK Pension Protection Fund (PPF), underpined by the introduction of risk-based levies. Commentators have suggested introducing some variant of the latter scheme in Ireland. The paper also examines alternative schemes that have been proposed to understand the dynamics of the level of underfunding and how this can be addessed. Finally it examines the risks inherent in DB schemes and details how these will affect the introduction of any mechanism that tries to address the levels of underfunding in Ireland.

Suggested Citation

  • John Cotter & David Blake & Kevin Dowd, 2012. "What Should Be Done About The Underfunding of Defined Benefit Pension Schemes?," Working Papers 201202, Geary Institute, University College Dublin.
  • Handle: RePEc:ucd:wpaper:201202
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    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201202.pdf
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    References listed on IDEAS

    as
    1. Cotter, John & Blake, David & Dowd, Kevin, 2006. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," MPRA Paper 3498, University Library of Munich, Germany.
    2. Langetieg, T. C. & Findlay, M. C. & da Motta, L. F. J., 1982. "Multiperiod Pension Plans and ERISA," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(04), pages 603-631, November.
    3. 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.
    4. 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.
    5. Hsieh, Su-Jane & Chen, Andrew H. & Ferris, Kenneth R., 1994. "The Valuation of PBGC Insurance Premiums Using an Option Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 89-99, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ai, Jing & Brockett, Patrick L. & Jacobson, Allen F., 2015. "A new defined benefit pension risk measurement methodology," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 40-51.

    More about this item

    Keywords

    defined benefit; pension schemes; underfunding;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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