Defined Benefit Pension Research Articles

Solvency and performance persistence of defined benefit private and public pension plans

PurposeThis study aims to examine the solvency and performance persistence of defined benefit private and public pension plans (DBPPs) in the Republic of Congo.Design/methodology/approachThe authors use the 2 × 2 contingency table approach and the time product ratio (TPR)-based cross-product ratio (CPR) on data covering ten years from 2011 to 2020, with variable funded ratios and excess returns, to determine the solvency and performance persistence of defined benefit pension plans.FindingsThe authors document a lack of solvency and performance persistence in DBPP funds. They conclude that the solvency and performance of DBPP funds are not repetitive. The previous year's private and public defined benefit pension funds’ results do not repeat in the current year. Hence, the current solvency and performance of defined benefit pension funds are not good predictors of future funds' solvency and performance.Originality/valueTo the best of the authors’ knowledge, this study is the first to combine solvency and performance to examine the persistence of defined benefit pension plans in sub-Saharan Africa.

Valuing Losses of Pension Benefits

Valuing Losses of Pension Benefits

A defined benefit pension plan model with stochastic salary and heterogeneous discounting

AbstractWe study the time-consistent investment and contribution policies in a defined benefit stochastic pension fund where the manager discounts the instantaneous utility over a finite planning horizon and the final function at constant but different instantaneous rates of time preference. This difference, which can be motivated for some uncertainties affecting payoffs at the end of the planning horizon, will induce a variable bias between the relative valuation of the final function and the previous payoffs and will lead the manager to show time-inconsistent preferences. Both the benefits and the contribution rate are proportional to the total wage of the workers that we suppose is stochastic. The aim is to maximize a CRRA utility function of the net benefit relative to salary in a bounded horizon and to maximize a CRRA final utility of the fund level relative to the salary. The problem is solved by means of dynamic programming techniques, and main results are illustrated numerically.

Assessing the Efficiency of Defined Benefit Private and Public Pension Plans using Data Envelopment Analysis Adjusted Estimator

This study uses data envelopment analysis (DEA) adjusted estimator to assess the efficiency of defined benefit private and public pension plans in the Republic of Congo. We also incorporate the industry fund in the assessment. The authors apply constant return to scale (CRS) adjusted estimator input and output orientation. In input orientation, we intellectualize efficiency as the ability of defined benefit pension funds to reduce costs, whereas assets remain constant. In output orientation, we conceive efficiency as raising the return on investment in existing contribution, administrative, and investment cost capacities. CRS-adjusted scores depict that the defined benefit private pension fund is on the efficient frontier regarding its input and output. The defined benefit public and industry pension funds are off the efficient frontier. Hence the private sector ranked first, is more efficient than the public sector, ranked third. The industry sector is less efficient compared to the private sector but more efficient than the public sector. As far as efficiency studies are concerned, this study is the first in sub-Saharan Africa to use the DEA-adjusted estimator to assess the efficiency of defined benefit pension funds.

Analisis Pendukung Keputusan Dalam Menentukan Pemberian THR Kepada Pensiunan Menggunakan Metode Moora di Kantor Dana Pensiun Perkebunan (Studi Kasus: Dana Pensiun Perkebunan (Dapenbun)

<p>The Plantation Pension Fund is a pension fund that manages the defined benefit pension plan (PPMP) for employees of PT. Perkebunan Nusantara, besides that DAPENBUN also provides holiday allowances to retirees in accordance with the regulations set by the company. The purpose of this study is to provide good decisions, provide clear assessments and calculations with criteria that are in accordance with the eligibility to be selected. The method used in this research is the Multi-Objective Optimization On The Basic Ratio (MOORA) method using Hypertext Multi Language (HTML), Hypertext Processor (PHP). In this study, it can be seen that the highest optimization value is (A3) with Yi(max) = (0.381023) with a total THR of Rp. 3,814,406.08 then followed by (A4) which has Yi(max) = 0.303950 with a total THR of Rp. 3,040,792.46 ,(A2) with a value of Yi(Max) = (0.238024) with a total THR of Rp. 2,380,330.24, (A1) with a value of Yi(mx) = (0.227268) with a total THR of Rp. 2,275.423.68 and the smallest (A5) with a value of Yi(Max) = (0.162676) with a total THR of Rp 1,627,251.58.</p><p> </p><p><strong>Keywords:</strong> holiday allowance, decision support system, MOORA, PHP, HTML, MYSQL.</p>

Surplus Optimization in Defined Benefit Pensions Using the Regime‐Switching Model: Occupational Pension Plans in South Korea*

AbstractWe assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime‐switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extreme tail risks. Furthermore, we identify the surplus risk and return conditional on global macroeconomic status using a hidden Markov model. The main results are that (i) the DB pension portfolio should move from principal‐protected products to diverse capital market products, and (ii) the DB pension portfolio using the regime‐switching model outperforms an unconditional static portfolio.

The asset allocation of defined benefit pension plans: the role of sponsor contributions

What percentage of its assets should a defined benefit pension plan invest into stocks as its funding ratio varies? We show that the answer to this question depends on the institutional setting and in particular on the extent to which the sponsoring company contributes to the fund as the funding ratio varies. We consider two settings: in one setting, the sponsoring company contributes to its pension fund only if the funding ratio is below the target level (as is the case, for example, in the US); in the other setting, the sponsoring company always contributes to its pension fund (as is the case, for example, in Switzerland). We show that these two institutional frameworks lead to two different dynamics, conditional distributions of the funding ratios, and relationships between the current funding ratio and investment into stocks. For settings like the US, that relation is non-monotonic while for settings like in Switzerland, it is monotonically decreasing. Previous empirical findings point towards a similar pattern.

The association between public pension fund characteristics and pension accounting choices

PurposeThe choice of accounting methods is critical in measuring the performance and sustainability of a public defined benefit pension (DBP) plan, and such measurement has an impact on the effectiveness of the entire pension system. Prior literature rarely discusses the choice and rationale of the accounting assumptions for public DBP plans. This study fills the gap by investigating whether crucial plan characteristics, including operational performance, financial health, sponsor fiscal stress, and audit quality, are associated with the accounting assumptions of public DBP plans.Design/methodology/approachThe sample includes 1,170 plan-years from the intersection of the Center for Retirement Research and public DBPs' annual financial reports for the years 2001–2013. This study develops regression models to examine the relationship between the characteristics of public DBP practices and DBP accounting choices.FindingsThe empirical results show that the public DBPs that have better investment performance, higher funding status, less fiscal stress, and that are audited by Big 4 accounting firms are more likely to adopt conservative accounting choices.Originality/valueThe study documents the impact of crucial pension plan characteristics on public DBP managers' accounting choices, which were not extensively discussed in pension literature. The findings help us understand the rationale for employing different accounting treatments in the context of public pension fund practices. In addition, the study sheds light on policy implications for the future reform of public pension regulations.

Robust equilibrium strategies in a defined benefit pension plan game

This paper investigates the robust non-zero-sum games in an aggregated overfunded defined benefit pension plan. The sponsoring firm is concerned with the investment performance of the fund surplus, while the participants act like a union to claim a share of the fund surplus. The financial market consists of one risk-free asset and n risky assets. The firm and the union are ambiguous about the financial market and care about the robust strategies under the worst-case scenario. The union's objective is to maximize the expected discounted utility of the additional benefits. The firm's two objectives are to maximize the expected discounted utility of the fund surplus and the probability of the fund surplus reaching an upper level before hitting a lower level in the worst-case scenario. We present a general robust non-zero-sum game with stopping times, which contains the two objectives as special cases. Hamilton-Jacobi-Bellman-Isaacs equations and verification theorem are presented for the robust optimization problem. We obtain explicit solutions in the related two robust non-zero-sum games for the firm and the union. Numerical results are illustrated to depict the economic behaviors of the robust equilibrium strategies in these two different games.

Private benefits, fiscal costs and economic resource costs of the private defined contribution pension systems in Turkey

ABSTRACT This study addresses economic issues associated with the private defined benefit pension system in Turkey. Findings show that the new Turkish pension scheme has generated significant welfare improvements for individual investors, but at a loss in tax revenue and an economic resource cost to the country. If the bank-administered Tax-Free Contribution Accounts and/or Tax-Free Savings Accounts, similar to those operating in Canada, were adopted in Turkey and the requirement of holding government securities was lifted, such schemes would provide contributors with benefits similar to what they currently enjoy under the new Turkish scheme, while eliminating the economic resource costs of administration and improving their net fiscal impact.

Transforming Private Pensions: An Actuarial Model to Face Long-Term Costs

A common response in public pension systems to population ageing is to link pensions to observed longevity. This creates an automatic stabiliser that arises from the valuation of a private actuarially funded system. However, no private pension plan mechanism has been articulated to adapt to this ageing in relation to the increased costs it entails. Private pension plans focus on saving for retirement; capital is accumulated to pay for it. However, perceptions of health status change over time and, as retirement age approaches, concerns about long-term care (LTC) increase. Moreover, there is not enough time to plan for it sufficiently in advance. This paper proposes to incorporate a mechanism to add an allowance to the financial pension (retirement, disability, rotation) to cover LTC within a private defined benefit pension plan, in the case of a pensioner becoming dependent. Depending on a pensioner’s health status, both the expected number of payments and their intensity are transformed. For this purpose, a mechanism is defined (through Markov chains) to adapt the amount of LTC support to a beneficiary’s health-related life expectancy. The study’s main contribution is that it establishes a private pension plan model that offers to incorporate dependency aid through this mechanism into the economic pensions without increasing the total cost of the plan. It adapts to life expectancy according to a person’s state (healthy, disabled, dependent).

Optimal chance-constrained pension fund management through dynamic stochastic control

We apply a dynamic stochastic control (DSC) approach based on an open-loop linear feedback policy to a classical asset-liability management problem as the one faced by a defined-benefit pension fund (PF) manager. We assume a PF manager seeking an optimal investment policy under random market returns and liability costs as well as stochastic PF members’ survival rates. The objective function is formulated as a risk-reward trade-off function resulting in a quadratic programming problem. The proposed methodology combines a stochastic control approach, due to Primbs and Sung (IEEE Trans Autom Control 54(2):221–230, 2009), with a chance constraint on the PF funding ratio (FR) and it is applied for the first time to this class of long-term financial planning problems characterized by stochastic asset and liabilities. Thanks to the DSC formulation, we preserve the underlying risk factors continuous distributions and avoid any state space discretization as is typically the case in multistage stochastic programs (MSP). By distinguishing between a long-term PF liability projection horizon and a shorter investment horizon for the FR control, we avoid the curse-of-dimensionality, in-sample instability and approximation errors that typically characterize MSP formulations. Through an extended computational study, we present in- and out-of-sample results which allows us to validate the proposed methodology. The collected evidences confirm the potential of this approach when applied to a stylized but sufficiently realistic long-term PF problem.

Maximizing Capital Efficiency in US Defined Benefit Pension Plan Immunizing Portfolio Construction Using Derivatives and a Power Law Relationship

The author puts forth a framework for how to invest efficiently against the two dominant risk factors facing US pension plans—interest rates and credit spreads—as a function of the capital allocated to the asset–liability risk management function (the immunizing portfolio [IP]). The framework uses derivatives and other instruments to vary the nature of the hedge investments as a function of IP capital and seeks efficient use of that capital. The result is a glide path for the IP capital allocation that emphasizes interest rate risk management when IP capital is scarce while balancing interest rate and credit risk management when IP capital is plentiful.

Multiemployer Defined Benefit Pension Plans: Employer Withdrawals and Financial Vulnerability

Multiemployer defined benefit pension plans are facing severe funding challenges. The Pension Protection Act of 2006 requires that a multiemployer pension plan with an actuarial funded percentage of less than 80% must take corrective actions to improve its financial health. We use a regression discontinuity design to examine the effect of funding rule requirements on employer withdrawals from multiemployer pension plans. We find that multiemployer pension plans subject to funding rule requirements are about 14 percentage points more likely to experience employer withdrawals in a 1-year period compared to plans not required to take any corrective actions. We also find that plans with ex ante employer withdrawal experiences are more vulnerable to financial shocks such as the 2008 financial crisis. Our study provides important policy implications for regulators concerning best practices to build pension plan resilience to insolvency events.

Pension de-risking choice and firm risk: Traditional versus innovative strategies

We examine the determinants of firms defined-benefit pension plan de-risking strategy choices and their impact on firm risk. We compile a hand-collected dataset for FTSE 350 firms for the period of 2009–2017. We find that hard freezing and pension buy-ins are more likely to be implemented when pension plans have longer investment horizons. In particular, pension plans that are exposed to higher investment risk are more likely to adopt pension buy-ins. Firms with larger capital expenditure and market capitalization are more likely to utilise innovative de-risking strategies (i.e. buy-in and longevity swap) in addition to traditional strategies (i.e. soft and hard freezing). Financially constrained firms are more likely to implement longevity swap over pension buy-ins. We also find that implementing pension de-risking strategies reduce firm risk. However, the effectiveness varies depending on the strategy with buy-ins having the largest impact in reducing risk.

Pembentukan Program Dana Pensiun Manfaat Pasti Dengan Metode Benefit Prorate Constant Percent

Every employee is entitled to a future guarantee after the end of the working period. This study aims to establish a defined benefit pension plan which shows whether the age at work and the age at entering the pension plan affect pension benefits and contributions. This research is a literature study using case studies from secondary data of employer pension fund programs at PT. PLN West Kalimantan Region. The results obtained from this study include: 1) the greater the age to enter the pension fund program, the higher the contribution to be paid each year based on the age at which a person enters the partnership, and 2) the greater the age at which a person enters work, the benefits he receives. will be smaller based on participants with different working age and entry age into the same pension plan.

Defined benefit pension de-risking strategy: determinants of pension buy-ins

ABSTRACT Many firms have sought to de-risk their pension provision by closing or freezing their defined benefit (DB) pension plans. This shifts future pension risk onto employees, but it does not de-risk the firm’s existing obligations. Pension buy-ins and buy-outs, which are a form of insurance, have become an established option for de-risking such obligations in several developed economies. This paper investigates the influence on pension buy-in transactions of the degree of risk associated with a firm’s DB pension obligations and, because of the substantial costs involved, the sponsor firm’s financial position. We employ hand-collected data between 2007 and 2017 to examine how pension fund and firm financial characteristics are related to both the occurrence and timing of buy-ins. Using probit analysis of UK FTSE 350 firms and a wide range of robustness checks, the findings show that firms that sponsor riskier DB pension funds, associated with higher investment risk and longer investment horizon, are more likely to engage in a pension buy-in transaction. We also find evidence that firms with greater financial slack are more likely to engage in buy-ins. Survival analysis reveals that those characteristics also tend to be significant influences upon the timing of buy-in transactions. Our study contributes to the literature on risk management in general and the literature on pension de-risking in particular, and it paves the way for research on pension buy-ins and buy-outs in other countries. Implications for firms with DB pension obligations and the insurance companies that offer pension buy-ins are identified.

Climate scenario analysis for pension schemes: a UK case study

Abstract This paper demonstrates how climate scenario analysis can be used for forward-looking assessment of the risks and opportunities for financial institutions, using a case study for a UK defined benefit pension scheme. It uses a top-down modelling tool developed by Ortec Finance in partnership with Cambridge Econometrics to explore the possible impacts of three plausible (not extreme) climate pathways of the scheme’s assets and liabilities. It finds that the funding risks are greater under all three climate pathways than under the climate-uninformed base scenario. In the absence of changes to the investment strategy or recovery plan, the time taken to reach full funding is increased by three to nine years. Given that most models currently used by actuaries do not make explicit adjustments for climate change, these modelled results suggest it is quite likely that pension schemes are systematically underestimating the funding risks they face.

Discounting and the Market Valuation of Defined Benefit Pensions

Discounting and the Market Valuation of Defined Benefit Pensions

Antecedents of and outcomes after finance committee use

AbstractWe study why firms voluntarily create and use finance committees and whether firms realize benefits. Firms are more likely to have a finance committee when they have defined benefit pension plans, debt equity issuance and active dividend payout. Capital expenditures, restructuring, material weaknesses in internal controls and restatements are drivers of creating a finance committee. While we find a weak association between finance committee use and financial performance on average, we find that finance committees that are highly independent have better‐performing investments. Finance committees contribute to lowering the cost of debt for firms with small audit committees.