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Pensions and Capital Structure

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  • John Ralfe
  • Cliff Speed
  • Jon Palin

Abstract

This paper considers the pension plan as part of the capital structure of the sponsoring employer. This enables lessons from financial theory concerning capital structure to be used to answer the question, “What assets should a pension fund hold?” The standard Modigliani-Miller framework is expanded on to consider the implications of corporate tax. This leads to the conclusion that bond investment for pension plans has tangible advantages over holding risky assets (e.g., equities). The paper considers a case study of the pension plan of the Boots Company, a U.K. pharmacy retailer with a pension fund of around £2.3 billion ($3.5 billion), where these ideas were put into practice. Finally, the paper discusses the value released to shareholders and the extra security members of the pension fund have derived from putting theory into practice.

Suggested Citation

  • John Ralfe & Cliff Speed & Jon Palin, 2004. "Pensions and Capital Structure," North American Actuarial Journal, Taylor & Francis Journals, vol. 8(3), pages 103-113.
    • Handle: RePEc:taf:uaajxx:v:8:y:2004:i:3:p:103-113
    DOI: 10.1080/10920277.2004.10596154
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    Cited by:

    1. 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.).
    2. Love, David & Smith, Paul A. & Wilcox, David, 2007. "Why Do Firms Offer Risky Defined–Benefit Pension Plans?," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(3), pages 507-519, September.

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