Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans

J. Michael Harrison and William Sharpe

No 935, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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: 1982-07
Note: PE
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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.
Published as Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans , J. Michael Harrison, William F. Sharpe. in Financial Aspects of the United States Pension System , Bodie and Shoven. 1983

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