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Sponsoring company finance and investment and defined benefit pension scheme deficits

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  • Webb, David C.

Abstract

This paper presents a model of the interaction of a company’s financial and real investment decisions with the financing of its defined benefit pension plan. The pension plan deficit is a debt of the company, with explicit funding requirements and priority in the event of company insolvency. Pension plan deficits and options on future deficits and surpluses affect investment incentives as does the size and composition of company debt. We illustrate the incentives for the firm to pay dividends rather than fund the pension plan and the general incentives to overfund the pension plan. We also illustrate the impact of pension benefit insurance and minimum funding requirements.

Suggested Citation

  • Webb, David C., 2004. "Sponsoring company finance and investment and defined benefit pension scheme deficits," LSE Research Online Documents on Economics 24699, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24699
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    File URL: http://eprints.lse.ac.uk/24699/
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    References listed on IDEAS

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    Cited by:

    1. Inkmann, Joachim & Blake, David, 2004. "Liability valuation and optimal asset allocation," LSE Research Online Documents on Economics 24754, London School of Economics and Political Science, LSE Library.

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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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