Pension Risk Management in the Enterprise Risk Management Framework

Journal of Risk and Insurance, Volume 84, pp. 345–365, 2017.

51 Pages Posted: 11 Mar 2016 Last revised: 3 Apr 2018

See all articles by Yijia Lin

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Richard D. MacMinn

National Chengchi University; The University of Texas

Ruilin Tian

North Dakota State University - Department of Accounting, Finance, and Information Systems

Jifeng Yu

University of Nebraska-Lincoln

Date Written: October 15, 2016

Abstract

This paper presents an enterprise risk management (ERM) model for a firm that is composed of a portfolio of capital investment projects and a defined benefit (DB) plan for its workforce. The firm faces the project, operational and hazard risks from its investment projects as well as the financial and longevity risks from its DB plan. The firm maximizes its capital market value net of pension contributions subject to constraints that control project, operational, hazard, financial and longevity risks as well as an overall risk. The analysis illustrates the importance of integrating pension risk into the firm’s ERM program by comparing firm value with and without integrating pension risk with other risks in an ERM program. We also show how pension hedging strategies can impact the firm’s net value under the ERM framework. While the existing literature suggests that a longevity swap is less expensive than a pension buy-out because the latter is more capital intensive, this analysis shows that the buy-out is more effective in increasing firm value.

Keywords: defined benefit pension plan, enterprise risk management, conditional value-at-risk, pension de-risking

Suggested Citation

Lin, Yijia and MacMinn, Richard D. and Tian, Ruilin and Yu, Jifeng, Pension Risk Management in the Enterprise Risk Management Framework (October 15, 2016). Journal of Risk and Insurance, Volume 84, pp. 345–365, 2017., Available at SSRN: https://ssrn.com/abstract=2745363 or http://dx.doi.org/10.2139/ssrn.2745363

Yijia Lin (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Richard D. MacMinn

National Chengchi University ( email )

Taipei
Taiwan

The University of Texas ( email )

2317 Speedway
Austin, TX 78712
United States

Ruilin Tian

North Dakota State University - Department of Accounting, Finance, and Information Systems ( email )

Fargo, ND
United States
7012316544 (Phone)
7012316545 (Fax)

Jifeng Yu

University of Nebraska-Lincoln ( email )

United States

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