Why Do Firms Offer Risky Defined Benefit Pension Plans?

David Love, Paul Smith and David Wilcox
Additional contact information
Paul Smith: Federal Reserve Board of Governors, http://www.federalreserve.gov/

No 2007-04, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: Even risky pension sponsors could offer essentially riskless pension promises by contributing a sufficient level of resources to their pension trust funds and by investing those resources in fixed-income securities designed to deliver their payoffs just as pension obligations are coming due. However, almost no firm has chosen to fund its plan in this manner. We study the optimal funding choice for plan sponsors by developing a simple model of pension financing in which the total compensation offered to workers must clear the labor market. We find that if workers understand the implications of pension risk, they will demand greater compensation for riskier pension promises than for safer ones, all else equal. Indeed, in our model, pension sponsors maximize their value by making their pension promises free of risk. We close by positing some explanations for why no real-world firm follows the prescription of our model.

Pages: 23 pages
Date: 2007-06
References: View complete reference list from CitEc
Citations:

Published in National Tax Journal, 2007, Vol. 60 (September), pp 507-519

Downloads: (external link)
https://web.williams.edu/Economics/wp/loverisky_pension_lsw2007.pdf Full text (application/pdf)

Related works:
Journal Article: Why Do Firms Offer Risky Defined–Benefit Pension Plans? (2007)
Working Paper: Why do firms offer risky defined benefit pension plans? (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wil:wileco:2007-04

Ordering information: This working paper can be ordered from

The price is Free.

Access Statistics for this paper

More papers in Department of Economics Working Papers from Department of Economics, Williams College Williamstown, MA 01267. Contact information at EDIRC.
Bibliographic data for series maintained by Greg Phelan ().