What the Pension Benefit Guaranty Corporation Can Learn From the Federal Savings and Loan Insurance Corporation

Abstract:     
The Pension Benefit Guaranty Corporation (PBGC) can learn from the experience of the Federal Savings and Loan Insurance Corporation (FSLIC). As was the case with FSLIC, the mismatch between the market-risk exposure of the corporate liabilities the PBGC insures and the assets backing them creates the potential for large shortfall losses. It is apparently a widespread belief among policy makers that a well-diversified pension portfolio of equity securities provides an effective long-run hedge against liabilities of defined-benefit pension plans, so that there is no mismatch problem. This belief is mistaken. When a pension plan sponsor invests the pension assets in equities, the actuarial present value cost to the PBGC of providing insurance against a shortfall increases rather than decreases with the length of the time horizon, even for plans that currently are fully funded.

JEL Classification: G2

working papers series