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The Value of Pension Benefit Guaranty Corporation Insurance

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  • Pennacchi, George G
  • Lewis, Christopher M

Abstract

This paper considers the cost of Pension Benefit Guaranty Corporation (PBGC) insurance for single-employer defined benefit pension plans. It derives a formula for the PBGC's liability that explicitly recognizes the two necessary conditions that must arise for the PBGC to sustain a loss. First, the corporation sponsoring the pension Iund must undergo bankruptcy and, second, this pension plan must be underfunded. The PBGC's liability is valued as a contingent put option and expressed as infinite series of modified Bessel functions. The comparative statics of the model are examined and are quite consistent with economic intuition. Copyright 1994 by Ohio State University Press.

Suggested Citation

  • Pennacchi, George G & Lewis, Christopher M, 1994. "The Value of Pension Benefit Guaranty Corporation Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 735-753, August.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:3:p:735-53
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    Cited by:

    1. Brown, Jeffrey R. & Pennacchi, George G., 2016. "Discounting pension liabilities: funding versus value," Journal of Pension Economics and Finance, Cambridge University Press, vol. 15(3), pages 254-284, July.
    2. Lucas, Deborah & Moore, Damien, 2019. "The student loan consolidation option," Journal of Public Economics, Elsevier, vol. 174(C), pages 1-12.
    3. Chao-Liang Chen, 2005. "The funding for a Defined Benefit (DB) pension plan based on the fair valuation of the plan's insolvency risk," Applied Economics, Taylor & Francis Journals, vol. 37(14), pages 1623-1633.
    4. Wolfgang Gerke & Ferdinand Mager & Timo Reinschmidt & Christian Schmieder, 2008. "Empirical Risk Analysis of Pension Insurance: The Case of Germany," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(3), pages 763-784, September.
    5. Michaelides, Alexander & Papakyriakou, Panayiotis & Milidonis, Andreas, 2019. "Corporate Pension Plan Funding Levels and Pension Assumptions," CEPR Discussion Papers 13591, C.E.P.R. Discussion Papers.
    6. Cotter, John & Blake, David & Dowd, Kevin, 2006. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," MPRA Paper 3498, University Library of Munich, Germany.
    7. Romaniuk, Katarzyna, 2019. "Premiums of the Pension Benefit Guarantee Corporation and risk-taking by pension plans," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 301-307.
    8. Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
    9. Chen, An & Uzelac, Filip, 2014. "A risk-based premium: What does it mean for DB plan sponsors?," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 1-11.
    10. Panageas, Stavros, 2010. "Bailouts, the incentive to manage risk, and financial crises," Journal of Financial Economics, Elsevier, vol. 95(3), pages 296-311, March.
    11. Joseph G. Haubrich & James B. Thomson, 1994. "A conference on federal credit allocation," Economic Review, Federal Reserve Bank of Cleveland, vol. 30(Q III), pages 2-13.
    12. Qian, Linyi & Shen, Yang & Wang, Wei & Yang, Zhixin, 2019. "Valuation of risk-based premium of DB pension plan with terminations," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 51-63.
    13. David A. Love & Paul A. Smith & David W. Wilcox, 2009. "Should risky firms offer risk-free DB pensions?," Finance and Economics Discussion Series 2009-20, Board of Governors of the Federal Reserve System (U.S.).
    14. Pennacchi & Pennacchi, George, 1998. "Government guarantees on pension fund returns," Social Protection Discussion Papers and Notes 20049, The World Bank.
    15. Panageas, Stavros, 2010. "Optimal taxation in the presence of bailouts," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 101-116, January.
    16. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.
    17. Ting-Fu Chen & Shih-Kuei Lin & An-Sing Chang & Wei-Hao Wang, 2022. "The Pricing Model of Pension Benefit Guaranty Corporation Insurance with Regime-Switching Processes," JRFM, MDPI, vol. 15(6), pages 1-23, June.

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