A Risk-Based Premium: What Does It Mean for DB Plan Sponsors?

40 Pages Posted: 14 Mar 2012 Last revised: 19 May 2013

See all articles by An Chen

An Chen

University of Ulm

Filip Uzelac

University of Bonn - The Bonn Graduate School of Economics

Date Written: March 13, 2012

Abstract

This paper develops a risked-based premium calculation model for the insurance provided by the Pension Benefit Guaranty Corporation (PBGC). It takes account of the pension fund's and the plan sponsor's investment policy and extends Chen (2011) by considering distress termination triggered by the sponsor's underfunding. We empirically illustrate our theoretical pricing formula for the 100 biggest American DB sponsoring companies. Our result clearly casts doubt on the current practice where about 70% of the PBGC premiums charged are flat. We observe that the funding ratio and the leverage are the main risk factors in a risk-based premium calculation.

Keywords: PBGC, Defined Benefit Plan, Distress Termination, Correlation, Sponsor Support

JEL Classification: G13, G23

Suggested Citation

Chen, An and Uzelac, Filip, A Risk-Based Premium: What Does It Mean for DB Plan Sponsors? (March 13, 2012). Available at SSRN: https://ssrn.com/abstract=2020994 or http://dx.doi.org/10.2139/ssrn.2020994

An Chen

University of Ulm ( email )

Helmholtzstrasse 20
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Filip Uzelac (Contact Author)

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

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