Does surplus/deficit sharing increase risk-taking in a corporate defined benefit pension plan?

Katarzyna Romaniuk ()
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Katarzyna Romaniuk: Xi’an Jiaotong-Liverpool University

Decisions in Economics and Finance, 2020, vol. 43, issue 1, No 12, 229-249

Abstract: Abstract This paper studies the surplus-/deficit-sharing effects on the risk-taking of a corporate defined benefit pension plan. Our analytical results show that when a surplus-/deficit-sharing rule is introduced, the participants’ risk-taking increases, while the direction of the surplus-/deficit-sharing effect on the equityholders’ risk-taking is ambiguous. The numerical analysis reveals that for plausible parameter values, the equityholders’ risk-taking increases due to the introduction of surplus/deficit sharing. The participants’ risk-taking increases much more substantially than the equityholders’ risk-taking when introducing surplus/deficit sharing. The participants’ risk-taking is more sensitive to the level of funding than the equityholders’ risk-taking: The participants’ risk-taking can become extremely high for low funding levels. This high sensitivity of the participants’ risk-taking to low funding levels is reduced by introducing deficit sharing. Risk-taking is independent of the funding level when the surplus and deficit proportions are equal.

Keywords: Defined benefit pension plan; Surplus sharing; Deficit sharing; Risk-taking; Participants; Equityholders (search for similar items in EconPapers)
JEL-codes: C61 D86 G11 G13 G23 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10203-019-00252-z

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