Skip to main content
×
×
Home

Joint risk of DB pension underfunding and sponsor termination: incorporating option-based projections and valuations into PIMS*

  • DEBORAH LUCAS (a1)
Abstract

When a private pension plan sponsor with an underfunded plan becomes insolvent, the difference between the value of the plan's assets and its termination liabilities represents a liability for the Pension Benefit Guaranty Corporation (PBGC). Hence, accurately modeling the joint statistical distribution over time of defined benefit pension underfunding and sponsor terminations is critical for estimating PBGC's prospective cash flows and evaluating its financial position. It appears that the current Pension Insurance Modeling System (PIMS) approach to modeling risk does a reasonable job of capturing its statistical properties effects on PBGC cash flows, although some of the aspects might be improved, and metrics expanded. The present paper outlines, how an option-based approach to modeling the joint distribution of defaults and underfunding in PIMS might be implemented, while preserving the strengths of the current model. Moving to an option-based approach would allow PIMS to be used to estimate the fair values of future liabilities. Such an approach could have a significant effect on the perceived financial position of PBGC.

Copyright
Footnotes
Hide All
*

The research reported herein was pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium (RRC); the author also acknowledges support from The Pension Research Council at The Wharton School. All findings and conclusions expressed are solely those of the author and do not represent the views of the SSA or any agency of the federal government, the MRRC, the PRC, or The Wharton School at the University of Pennsylvania.

Footnotes
References
Hide All
Congressional Budget Office (CBO) (2005). The Risk Exposure of the Pension Benefit Guarantee Corporation. CBO Study. Washington, DC: CBO.
Crosbie, P. and Bohn, J. (2003). Modeling Default Risk. Moody's KMV. Available online at http://business.illinois.edu/gpennacc/MoodysKMV.pdf
Hsieh, S.-J., Chen, A. H. and Ferris, K. R. (1994). The valuation of PBGC insurance using an option pricing model. Journal of Financial and Quantitative Analysis, 29: 8999.
Lucas, D. (2012). Valuation of Government Policies and Projects. Annual Review of Financial Economics, 4(6): 120.
Marcus, A. (1987). Corporate pension policy and the value of PBGC insurance. In Bodie, Z., Shoven, J. and Wise, D. (eds), Issues in Pension Economics. Chicago, IL: University of Chicago Press, pp. 4980.
Pennacchi, G. G. and Lewis, C. M. (1994). The value of pension benefit guaranty corporation insurance. Journal of Money, Credit and Banking, 26(3): 735753.
Pension Benefit Guarantee Corporation (PBGC) (2009). Pension Insurance Modeling System PIMS System Description for PIMS SOA ‘Core’ (vFY09.1). Washington, DC: PBGC.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed