Valuation of risk-based premium of DB pension plan with terminations

Qian, Linyi; Shen, Yang; Wang, Wei; Yang, Zhengming

doi:10.1016/j.insmatheco.2019.01.012

Cited by 5 publications

(7 citation statements)

References 14 publications

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“…These payments are frequently adjusted to match the risk associated with the provided insurance. Therefore, many studies have been conducted around the premium and PBGC insurance valuation approach (Bodie, 2006;Brown, 2008;Chen and Uzelac, 2014;Chen, Lin, Chang, and Wang, 2022;McCarthy, 2022;Qian, Shen, Wang, and Yang, 2019;Wilcox, 2006;Xie, Wang, Yang, and Zhang, 2021). Bodie (2006), Brown (2008), and Wilcox (2006) find that firms had adverse incentives due to the mispricing of PBGC insurance until 2008, as some sponsors only had to pay the flat rate premium, depending on the number of plan participants 13 .…”

Section: Literature Reviewmentioning

confidence: 99%

“…Chen and Uzelac (2014), Qian, Shen, Wang and Yang (2019), and Xie, Wang, Yang and Zhang (2021) use both sponsor assets or investment policies and pension funds to evaluate possible risk-based premiums using different models and processes. All these papers advocate adjusting premiums to reflect the associated risk.…”

Section: Literature Reviewmentioning

confidence: 99%

“…In such instances, the PBGC takes over the unfunded liability using its own assets. In the literature on termination, some papers study distressed terminations by testing moral hazard and tax benefit hypotheses and evaluating optimum pension premiums (typically risk-based) in exchange for the insurance provided by the PBGC (Chen, Yu, and Zhang, 2018;Lucas, 2015;Qian, Shen, Wang, and Yang, 2019). The moral hazard hypothesis postulates that the insurance contract with the PBGC provides an incentive for sponsors to underfund their pension plans and to invest in risky assets (Chen, Yu, and Zhang, 2018;Treynor, 1977).…”

Section: Luimentioning

confidence: 99%

“…Another set of papers analyse distressed terminations, which mostly concentrate on testing the moral hazard and tax benefit hypotheses, and evaluating optimum pension premiums (typically risk-based) in exchange for the insurance provided by the PBGC (Chen, Yu, and Zhang, 2018;Lucas, 2015;Qian, Shen, Wang, and Yang, 2019). My study addresses the research gap in the field of pension plan termination regardless of the type of plan and firm.…”

Section: Introductionmentioning

confidence: 99%

“…Marginal effects in Probit Regression for probability of voluntary contribution with funding status and investment return as explanatory Results with the Probit estimates of Table Effect OLS model results with lambda created in Table Descriptive statistics of firms in terms of terminated and non-terminated samples Probit estimation and marginal effects on plan termination at Average marginal effects of original variables (No transformation) for both and Phillips-Perron (PP) tests of stationarity. ................ Table C-2: Lag-order selection statistics (Sample: 1966-2019 Comparison of some important factors between the historical and the simulated data (using investment indices presented in viii sample, used sample, anddropped sample..................... Figure 3-2 : Number of Non-zero Voluntary Contributions andMean of Marginal Tax Rate by Year (1991-2016).…”

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confidence: 99%

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Essays on Defined Benefit Pension Plans in the USA

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This thesis contains three fundamental and empirical essays with the aim of finding the optimum full funding limit policy for the defined benefit (DB) pension plan system in the USA in terms of Government tax earnings and pension claims. To achieve this aim, I study sponsor contributions and plan terminations in the first two essays and building on these I investigate the optimum policy limit in the third essay of the thesis. In the first essay, I investigate the influence of enforcement of full funding limits on sponsor contributions to private DB pension plans in the US. The full funding limit is a limit on the maximum asset amount that restricts the tax advantages of making voluntary contributions to pension funds. This essay fills a research gap by using only voluntary contributions to analyse the impact of the full funding limit. The results show that, sponsors are less likely to make tax-deductible voluntary contributions when the plans’ funding ratio surpasses the full funding limitation. At the other hand, a lower than required pension plan funding ratio (pension assets/ pension liabilities) increases the likelihood of a voluntary contribution. These findings together support the idea that sponsors want to prefund the balance, but only until any tax advantages are maximized. The second essay includes the full funding limit policy along with both firm and plan specific variables in studying termination decisions using a more comprehensive dataset than used in any previous study. The analysis shows that the condition of the firm only affects the termination decision for PBGC trusteed termination. The state of the plan affects both standard and PBGC trusteed terminations, but in differing ways. The tax rate affects the termination decisions, but in a manner that depends on the funding status of the plan and the type of termination. The third essay determines the optimum value of the full funding limit percentage to ensure better funding positions for defined benefit pension plans and higher profit (i.e., tax earnings – PBGC claims) for the Government. Using estimates from the first two essays and actuarial assumptions for projecting the 757 existing firms for the next 50 years, I generate scenarios to calculate the profit of the Government using tax earnings and PBGC claims for different full funding limitation percentages. My results show that, although the range is larger than the current policy, a narrow range for the full funding limit (110% of pension liability over pension assets) yields the maximum profit. This limit generates the highest tax earnings and the lowest PBGC claims out of all the tested possibilities (which ranged from 100% to 200%). The effect of this limit on tax earnings is the major contributing factor behind this finding.

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