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Managing Sponsor Risk in Pension Plans: Dynamic Strategies vs. Pension Assurance

43 Pages Posted: 31 Oct 2011 Last revised: 26 Jun 2016

Samuel J. Sender

Tilburg University - Department of Econometrics & Operations Research; Netspar; Tilburg University - Center for Economic Research (CentER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 7, 2014

Abstract

Defined-benefit (DB) pension funds, often underfunded, rely on the legal obligation of their sponsor to secure pension rights for individuals.

Because that guarantee is risky, ways must be found to secure the pension promises. This paper is the first to identify the optimal pension fund portfolio, taking into account the riskiness of the sponsor's guarantee.

These schemes may be undermined by agency conflicts. This paper identifies the optimal pension fund portfolio, taking into account the riskiness of the sponsor's guarantee and risk-shifting incentives at pension funds.

Lastly, this paper shows that offering pension funds a limited, riskless external insurance against sponsor risk to replace the potentially unlimited but risky sponsor guarantee reduces the risk-shifting incentives at pension funds and fully mitigates sponsor risk. The optimally designed Pension Indemnity Assurance (PIA) gives incentives that are opposite those of public protection schemes such as the PBGC or PPF.

An appendix detailing the implementation of such 'First-Best' generalised portfolio insurance strategies is available at the following URL: http://ssrn.com/abstract=2509057

Keywords: Pension Fund, Asset Allocation, Asset and Liability Management, Defined-Benefit, Risk-Management, Risk-Shifting, Sponsor Put, Sponsor Risk, Portfolio Insurance

JEL Classification: G11, G23, G31, G32, C61

Suggested Citation

Sender, Samuel J., Managing Sponsor Risk in Pension Plans: Dynamic Strategies vs. Pension Assurance (October 7, 2014). Available at SSRN: https://ssrn.com/abstract=1939056 or http://dx.doi.org/10.2139/ssrn.1939056

Samuel J. Sender (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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