Who Owns the Assets in a Defined Benefit Pension Plan

32 Pages Posted: 27 Apr 2000 Last revised: 13 Jul 2010

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Myron S. Scholes

Stanford Graduate School of Business; Platinum Grove Asset Management L.P.; Oak Hill Platinum Partners, LLC

Date Written: July 1982

Abstract

The liability to employees in a defined benefit pension plan is the present value of vested benefits, the present value of the benefits that employees would receive on the immediate termination of the pension plan. This is the literal and simple definition of the liability. Although it leads to an understanding of the economics of the promise of a pension, several common provisions of pension plans make it necessary to expand the definition. Anomalies such as vesting, early retirement benefits, lump sum provisions, and ad hoc increases in benefits for retired employees indicate that employees accrue benefits that exceed their benefits on a termination of the plan. These anomalies, however, can be explained by requiring that employees as a group possess specific human capital. Although losing one or a few employees from the group would be a small loss, losing the group of employees would be a great loss. In this group model, employees bargain with the stockholders over the compensation of the entire group; they allocate . their compensation according to marginal product, returns from previous equity investments in the human capital of the group, and to purchases and sales of claims on this capital. The model explains the anomalies as a natural outgrowth of the transactions of members within the group. In addition, the model explains the use of defined benefit pension plans, and how employees could have claims, in excess of vested benefits, on the assets in the pension plan.

Suggested Citation

Bulow, Jeremy I. and Scholes, Myron S., Who Owns the Assets in a Defined Benefit Pension Plan (July 1982). NBER Working Paper No. w0924, Available at SSRN: https://ssrn.com/abstract=226907

Jeremy I. Bulow (Contact Author)

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Myron S. Scholes

Stanford Graduate School of Business ( email )

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Platinum Grove Asset Management L.P. ( email )

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Oak Hill Platinum Partners, LLC ( email )

1100 King Street, Building 4
Rye Brook, NY 10573
United States

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