Replicating Default Risk in a Defined-Benefit Plan

Richard A. Ippolito

affiliation not provided to SSRN

George Mason Law & Economics Research Paper No. 03-07

A stock-bonus plan with a provision to permit diversification can come close to replicating the classic default risks in defined-benefit pension plans. The diversification formula is a function of a worker's service in the company and the particular features of the defined benefit (DB) plan that are being reproduced. The diversifiable stock-bonus (DSB) plan still gives workers a stake in the financial performance of the company, but the diversification formula eliminates the extreme downside of a traditional stock-bonus plan, namely, the possibility that workers could lose up to all of their retirement accounts after long years of service. Because the DSB plan imposes about the same default risks on workers as a DB plan, workers' compensation levels with a DSB plan need not be any higher than in a traditional pension plan.

Keywords: Corporate Finance, Portfolio Management: asset/liability management

Not Available For Download

Date posted: February 12, 2003  

Suggested Citation

Ippolito, Richard A., Replicating Default Risk in a Defined-Benefit Plan. Financial Analysts Journal, Vol. 58, No. 6, November/December 2002. Available at SSRN: https://ssrn.com/abstract=377461

Contact Information

Richard Ippolito (Contact Author)
affiliation not provided to SSRN
Feedback to SSRN

Paper statistics
Abstract Views: 741