A Termination Rule for Pension Guarantee Funds

26 Pages Posted: 20 Feb 2018

See all articles by Chunli Cheng

Chunli Cheng

Sun Yat-Sen University (SYSU) - Lingnan (University) College

Filip Uzelac

University of Bonn - The Bonn Graduate School of Economics

Date Written: March 2018

Abstract

A termination rule based on a critical funding ratio is proposed for a pension guarantee fund (PGF) that considers closing an underfunded pension plan. This ratio is determined by solving an expected utility maximization problem on behalf of plan beneficiaries subject to two constraints designed to preserve the PGF's viability. The first is an upper bound on the PGF's annual intervention probability; the second, a restriction on the expected shortfall of an underfunded pension plan that is not closed. Both too low and too high critical funding ratios hurt beneficiaries’ interests, depending on their degree of risk aversion.

Suggested Citation

Cheng, Chunli and Uzelac, Filip, A Termination Rule for Pension Guarantee Funds (March 2018). Journal of Risk and Insurance, Vol. 85, Issue 1, pp. 275-300, 2018, Available at SSRN: https://ssrn.com/abstract=3124658 or http://dx.doi.org/10.1111/jori.12150

Chunli Cheng (Contact Author)

Sun Yat-Sen University (SYSU) - Lingnan (University) College

135 Xingang Xi Road
Haizhu District
Guangzhou, Guangzhou 510275
China

Filip Uzelac

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

Adenauerallee 24-26
Bonn, D-53113
Germany

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