Pension Plans Research Articles

Equilibrium strategies in a defined benefit pension plan game with regime switching

This paper studies the optimal management of an aggregated overfunded pension plan of defined benefit type as a stochastic differential game in a Markovian regime-switching environment. In this asymmetric two-player game, the worker participants act collectively as a single player that claims a share of the surplus, and the sponsoring firm acts as the player who cares about the investment of the surplus fund assets. We formulate the game model in two scenarios, and use the dynamic programming technique to derive the coupled Hamilton-Jacobi-Bellman equations in each scenario. Furthermore, we propose an efficient algorithm that incorporates a kind of quasi-Newton method and the Runge-Kutta scheme to obtain the equilibrium strategies. Finally, we employ a numerical example to verify our algorithm and analyze the impact of model parameters.

Mitigating risk-shifting in corporate pension plans: Evidence from stakeholder constituency statutes

We use staggered enactments of state stakeholder constituency laws as a natural experiment to examine the effect of such laws on corporate pension risk shifting. Our analysis encompasses three components of pension risk shifting: funding risk, investment risk, and benefit risk. We observe a reduction in all three elements of pension risk shifting following the enactment of stakeholder orientation laws that promote greater consideration of stakeholder interests. We also find that the post-enactment reduction in pension risk-shifting is greater for firms with fewer investment opportunities. Overall, our results provide insight into how stakeholder constituency can mitigate an important form of risk-shifting.

The Retirement Plan Dilemma: Who Is Best Prepared for Retirement in Today’s Environment?

This study examines the factors affecting retirement preparation through employer-sponsored retirement plans using the Survey of Consumer Finances’ (SCF) 2019 data. Various socio-economic and demographic variables are analyzed for significance regarding employee participation in and contributions to employer sponsored retirement plans. Our results indicate that gender, marital status, age, race, financial literacy, risk tolerance, inheritance expectation, and income are all important factors that affect plan participation rates as well as contribution levels. For minority women, income appears to be the most crucial factor in increasing participation. The results provide some implications for policymakers about improving retirement plan policies for women and minorities. The findings may also help individuals make better retirement planning decisions, especially in the face of possible social security benefit shortages and pension plan changes. This study is of great importance, as current retirement plans place a greater responsibility on both employers and individuals for retirement planning.

Supporting Ageing Populations in Developing Countries: A Comparative Analysis of Pension Schemes and Policy Insights

The rapid growth of the elderly population is a major global demographic and social issue. Unfortunately, there is a shortage of pension plans and social security programmes for this population in developing countries, which has severe consequences for their quality of life and well-being. In this article, we aim to better understand the pension systems in developing country contexts such as Ghana, Pakistan, and Myanmar by reviewing official government materials (for example, pension reports) and the published literature to suggest relevant policy recommendations. We observed several policy implementation gaps and inequities in pension schemes for older people, specifically for informal and private sector workers. Considering the size of formal versus informal economies and the level of development index of each country, we suggest a wide variety of options for pension policies, financing, designing cash benefits, and pension payments to cover all older citizens. This article addresses the unmet needs of the elderly and their wider economic sustainability to ensure social justice and resource utilisation. Governments in developing countries should embrace and establish unique, inclusive, and friendly policies encompassing the informal sector to warrant older adults’ functional and social well-being with dignity and honour.

On the benefits of pension plan consolidation: Understanding the impact of full plan mergers

Abstract This study investigates the benefits and drawbacks of pension plan consolidation by quantifying the impact of mergers of heterogeneous plans on different stakeholders in a unique Canadian implementation of defined benefit plans. Using a comprehensive framework that combines a realistic economic scenario generator, a stochastic mortality model that captures differences among subpopulations, a cost model with economies of scale, and a dynamic asset allocation methodology, we evaluate the combined effect of asset- and liability-side changes on three groups of measures: plan-related risk measures assessing profits from an economic capital perspective, consumption-based metrics to understand the impact on members, and contribution risk measures capturing the risk from the employer’s viewpoint. We apply the framework to a hypothetical and empirically relevant merger and find that consolidation is favorable under most circumstances: the positive impacts of better diversification and economies of scale continue to outweigh the negative effects of heterogeneity even when the merging plans have different mortality expectations, different maturity levels, or modest differences in initial funded ratios.

Challenging the policy space: The legitimation of alternatives in Chilean pension policy (1980–2019)

AbstractIn October 2019, Chile experienced its most significant cycle of protests since the return to democracy in 1990; one of the primary demands of this cycle was the improvement of pensions. What effect did the October upheaval have on the Chilean pension policy debate? How have ideas about the Chilean pension plan changed from its creation in 1981−2019? What are the main drivers of these changes? In this study, we propose the concept of policy space, which we define as the realm of ideas wherein public policies are debated and whose boundaries are determined by the legitimacy of ideas from relevant actors. We use a process‐tracing approach based on qualitative data triangulation from several techniques including in‐depth interviews, press analysis, and secondary document review. The findings indicate that the shift in the ideas related to pension policy is explained by two drivers—long‐term linkage among actors and short‐term social mobilization against the private pension system, which accelerated rapidly with the October 2019 protests.

Defined benefit pension plan inhibit the emergence of cooperation in the public goods games

As a social welfare, pension insurance has provided a great assistance to retiree in maintaining their livelihoods. In order to reward the contributions made by cooperators, an additional pension income is provided to them. In this paper, we study a public goods game based on the pension system on population structure, in which only cooperators can purchase pension insurance and receive pension benefits upon meeting specified conditions. In the simulation, we demonstrate the evolution of cooperation frequency over time and investigate the influence of insurance premium, pension baseline, the number of defected neighbors of cooperators, and the enhancement factor on the cooperation frequency. Additionally, we examine the impact of the pension system on cooperative behavior in triangular and hexagonal networks. Our results suggest that in the public goods game on networked structure, the pension system not only fails to promote cooperation but actually inhibits it, even when cooperators do not have to pay any costs and can receive pensions when conditions are met.

Worst-case Conditional Value at Risk for asset liability management: A framework for general loss functions

Asset–liability management (ALM) is a challenging task faced by pension funds due to the uncertain nature of future asset returns, employees’ wages, and interest rates. To address this challenge, this paper presents a new mathematical model that uses a Worst-case Conditional Value-at-Risk (WCVaR) constraint to ensure that, with high probability, the funding ratio remains above a regulator-mandated threshold under the worst-case density function that plausibly explains historical sample data. A tractable reformulation of this WCVaR constraint is developed based on the definition of the Worst-case Lower Partial Moment (WLPM) for a general loss function. Additionally, a data-driven moment-based ambiguity set is constructed to capture uncertainty in the moments of the density functions of random variables in the ALM problem. The proposed approach is evaluated using real-world data from the Canada Pension Plan (CPP) and is shown to outperform classical ALM models, based on either CVaR or WCVaR with fixed moments, on out-of-sample data. The proposed framework for handling correlated uncertainty using WCVaR with nonlinear loss functions can be used in other application areas.

Equilibrium multi-period investment strategy for a DC pension plan with incomplete information: Hidden Markov model

In the financial market with both observable and unobservable market states, this article explores the equilibrium investment strategy for a DC pension plan with the mean-variance criterion in a discrete-time setting. The dynamics of the partially observed market state are described by a discrete-time finite-state hidden Markov chain. There is a riskless asset and a risky asset in the financial market, where the return rate of the risky asset depends both on the observable and unobservable market states. Meanwhile, the stochastic salary process is also modulated by the observable and unobservable market states. Under the framework of non cooperative game, we first define the equilibrium investment strategy for the multi-period mean-variance DC pension plan. By adopting the sufficient statistics method, the investment problem for the mean-variance DC pension plan with incomplete information is transformed into the one with complete information. The closed-form equilibrium investment strategy is derived by solving the extended Bellman equation. Finally, numerical results show that the incomplete information has significant impacts on the equilibrium investment strategy and the equilibrium efficient frontier. Neglecting the reality of incomplete information in the financial market will reduce the investment benefit of the DC pension plan. The longer the investment horizon, the greater the investment benefit loss for the DC pension plan.

Informing the recruitment crisis in policing: Evaluating which incentives can entice the best candidates among college students

AbstractResearch SummaryScrutiny over the quality of police work continues to increase, at the same time that a recruitment crisis may hinder policing services. Moreover, this crisis exists despite numerous work incentives for officers, which are potentially competitive salaries, early pensions, and legal protections. Using a sample of 604 undergraduate students—a natural recruiting pool for police agencies—this study explores the predictors of students’ interest in a career in policing. In addition, we conducted a randomized survey experiment to identify the effect of work incentives on students’ willingness to apply to be a police officer upon graduation. Specifically, we manipulated the starting salary, years of service until pension eligibility, and the protection afforded against lawsuits. Finally, we tested whether the effect of these incentives differs across the quality of applicants (i.e., grade point average [GPA], ability to pass existing application criteria, and subjective qualities that comprise honesty, teamwork, and compassion) and their preexisting interest in a career in policing. We found that students are generally uninterested in becoming police officers, particularly when their GPA is high. Though the starting salary was the most impactful of all incentives, some lawsuit protection is key for enticing the best students. In contrast, conditions for pension had only modest if any effects.Policy ImplicationsRecruiting is key to improving the quality of policing, particularly when many potential candidates are overlooking the career. However, research on the causes and consequences of police recruitment strategies is limited. This study implements rigorous research methods to investigate how to increase the pool of high‐quality applicants to police agencies. Findings support sensible and potentially cost‐effective policy decisions in regard to police recruiting, which should focus on increasing the starting salary, and on more effectively communicating the value of other existing benefits of the career that comprise lawsuit protection and attractive pension plans.

The actuarial sources of the rise in unfunded liabilities in America's defined benefit plans in the 21st century

Abstract Despite a decade-long bull market between the financial crisis and the COVID-19 recession, state defined benefit pension plans had accrued more than $1.37 trillion in unfunded liabilities. However, little work has investigated the actuarial sources of these unfunded liabilities. This paper uses original data hand collected from publicly available financial reports between 2000 and 2020 for 145 state-administered pension plans to determine the sources of unfunded liabilities. The largest unfunded liability contributor is investment experiences (when actual investment returns do not match assumed returns). The second and third largest contributors are changes to actuarial assumptions and expected changes (or interest accruing on existing unfunded liabilities). Benefit experience and legislative changes, demographic experience, and explicit funding shortfalls account for relatively little of the growth in unfunded liabilities. Moreover, the specific sources of unfunded liabilities are heterogeneous over time and across plans.

Optimal additional voluntary contribution in DC pension schemes to manage inadequacy risk

AbstractIn defined contribution pension schemes the member bears the investment risk and her main concern is to obtain an inadequate fund at retirement. To address inadequacy risk, flexibility is often given to the member to pay additional voluntary contributions (AVCs) into the fund. In many countries the AVC schemes allow members of the workplace pension plan to increase the amount of retirement benefits by paying extra contributions. In this paper, we define a target-based optimization problem where the member of an AVC scheme can choose at any time the investment strategy and the AVCs to the fund. In setting the problem, the member faces a trade-off between the importance given to the stability of payments during the accumulation phase and the achievement of the desired annuity at retirement. We derive closed-form solutions via dynamic programming and prove that (i) the optimal fund never reaches the target final fund, (ii) the optimal amount invested in the risky asset is positive, and (iii) the optimal AVC is higher than the target one. We run numerical simulations to allow for different member’s preferences, and perform sensitivity analyses to assess the controls’ robustness.

The accounting for defined benefit pension plans in family firms

AbstractThis paper investigates the accounting for defined benefit pension plans in U.S. family firms. Relying on agency theory and the literature on defined benefit pension plans, we test whether the allocation of pension plan assets, the expected rate of return on pension plan assets and the contributions to defined benefit pension plans in family firms are significantly different from those in non‐family firms. Relying on a sample of U.S. firms over the period 2004–2018, we first document that family firms take more risk when allocating their pension plan assets relative to non‐family firms where they allocate a larger (smaller) percentage of pension plan assets in equity (debt) securities. We also show that family firms are more aggressive in setting the expected rate of return on pension plan assets than non‐family firms. However, family firms’ contributions to defined benefit pension plans are comparable to those of non‐family firms. Our findings hold after controlling for the endogeneity in family firms. These findings are important since they provide first hand empirical evidence on the accounting for defined benefit pension plans in family firms. They further shed light over pension plans that serve as a key tool to attract and retain executive talents and make up a significant portion of firms balance’ sheets.

Robust time-consistent strategies of DC pension plans with the return of premiums clauses under inflation

. This article investigates the robust time-consistent investment strategy for a DC pension plan with model uncertainty under the mean-variance optimization objective. For the avoidance of reductions in investment returns due to inflation risk and premature death of members, an inflation-indexed bond is introduced into the financial market and a return of premium clause is incorporated into the model. By establishing extended Hamilton-Jacobi-Bellman (HJB) equations, the explicit solutions of both the robust precommitment strategy and the robust time-consistent strategy are presented by virtue of the robust optimal control theory and the stochastic dynamic programming approach. Furthermore, two degradation cases are derived in detail. Finally, a numerical example demonstrates the analysis of the obtained results.

De-risking pension plans: the impact on firm value from lump-sum buyouts

Firms have attempted to de-risk their pension obligations by offering its pension beneficiaries a lump-sum distribution instead of the guaranteed payments to be paid to retirees in a defined benefit pension plan. We examine the stock market reaction to the announcement of these offerings using event study methodologies. We find a statistically significant positive cumulative abnormal returns for the 20-day period prior to the event, the 20-day period after the event, and for the entire 41-day event period surrounding the announcement. We also find that the cumulative abnormal returns are higher the more liabilities a firm has and increases with the level of funding of the pension plan. Our results contribute to the literature on pensions by finding that firms that buy out their pensioners’ defined benefit payments via a lump-sum distribution experience an increase in firm value. There is a significant amount of analysis of such buyouts in the literature and in the press, but our results are the first to examine and document the increase in value derived from such pension changes. We also more fully develop the motivations for such events from a cost/benefit perspective.

Are Companies Offloading Risk onto Employees in Times of Uncertainty? Insights from Corporate Pension Plans

AbstractWe investigate how firms adjust corporate pension plans in response to economic policy uncertainty (EPU). Using a sample of US-listed firms, we find that firms increase pension underfunding levels when facing higher EPU. The result is robust to controlling for pension portfolio returns, discount rates, plan sizes, pension liability, numbers of employees, other macroeconomic factors, difference-in-differences and instrumental variable estimation, and additional evidence of pension risk-shifting. Further analysis reveals that financial distress and information asymmetry induced through EPU are the potential channels. The effect is stronger for firms having CEOs being excessively paid, using cash flow as a performance metric in CEO compensation, paying high dividends, and having short-term institutional investors, whereas the presence of unions, positive corporate culture, and social capital alleviate the effect. Notably, managers, not shareholders, appear to be the party reaping the benefits. Our findings suggest that firms may shift risk to employees in response to heightened uncertainty and institutional characteristics play a moderating role in this crucial business ethics issue.

Improving the Rehiring Process and Employee Retention at KC Coal Mining Company

In Indonesia, the rehiring of retirement and new contract employees is governed by various labor laws and regulations. The primary legislation that covers employment matters in Indonesia is the Labor Law (Law No. 13 of 2003 concerning Manpower) and its implementing regulations. Article 35, paragraph (1) Retirement in Indonesia generally occurs when an employee reaches the mandatory retirement age, which is typically set at 55 years old. However, this age may vary based on certain circumstances and job positions. Employers are expected to provide retirement benefits to employees who are eligible for retirement. These benefits might include severance pay, pension plans, or other retirement-related benefits. The rehiring of retired employees and new employees has gained prominence as organizations seek innovative strategies to address workforce challenges. This study investigates the motivations behind and advantages associated with retirees and new employees on a contract basis, focusing on a case study conducted within a coal mining company in Indonesia. The objective is to illuminate the drivers and benefits of rehiring retired personnel, shedding light on their impact on organizational performance and employee dynamics. Through qualitative and quantitative research methods, including questioner, interviews, and surveys, this study explores the reasons that prompt the reemployment of retirees and reemploying contract employees for a period of up to 5 years, examining factors such as their domain expertise, institutional knowledge, and the evolving nature of work. Moreover, the study assesses the tangible and intangible benefits of such rehiring practices, encompassing enhanced productivity, cost-effectiveness, mentorship opportunities, and knowledge transfer. The case study approach provides contextual insights into the unique challenges and opportunities within the coal mining industry in Indonesia while also contributing to the broader discourse on talent management strategies. The findings contribute to a deeper understanding of the potential advantages and considerations associated with engaging retirees in the workforce, offering implications for human resource practices, organizational strategies, and the future of work dynamics.

UNVEILING THE INVISIBLE:EXAMINING THE LEGAL COMPLEXITY AND SOCIAL SECURITY BENEFITS OF GIG WORKERS

Gig economy has seen dramatic increase in the workforce participation due to Digital Revolution, Excess Labour supply, Outbreak of Pandemic 2020. However, Gig workers are struggling for social security benefits(Health Benefits, Pension Plans, Maternity Leaves, Accidental Plans, Insurance, Leave Payment, Accidental benefits), that is essential for just and equitable society that governed by regulatory bodies through statutes. However, Unorganized economy in general and particularly Gig workers aredenied to have economic protection due to their legal Status. Prior to Code on Social Security 2020 gig workers are considered as sharing partners and Firms are not obliged to provides economic benefits to sharing partners. Despite having potential,Gig workers have no social security due to the legal complexity of their status as compared to traditional workers. This paper is an attempt to examine the legal taxonomy and analysis of social security issues and to understand the potential and reach of gig workers in the economy. Objective: 1. To examine the legal Status of Gig workers in India. 2. To Understand the social security issues of gig workers. 3. To understand the potential and reach of gig workers in the economy. Hypothesis: 1. The legal status of traditional and Gig workers is the same. 2. There is no significant difference in social security available to traditional and Gig Workers 3. There is no impact of the Gig economy on the Nations Economy. Research Methodology: This research paper is solely based on secondary research from various published and unpublished sources like Magazines, Websites, Newspapers, and Government and non-government organizations.

Financial literacy and financial advice seeking: Does product specificity matter?

We study the effect of financial literacy on financial advice seeking. We test the relationship across different measures of the former and the latter, providing a contribution to the existing literature. Overall results suggest complementarity, but when considering product-specific financial literacy and financial advice seeking, a complementary effect emerges for investments and debt, while a substitution effect prevails for insurance and pension products. Financial advising services can therefore compensate for the lack of financial literacy in insurance and pension planning in the short run. Conversely, greater policy efforts are needed for investment and loans, where poor financial literacy translates into a scarce demand for financial advice.

Aggregate portfolio choice

Important portfolio choice decisions are made for large groups of heterogeneous individual investors. I propose solving the cross-sectional average of the individual Euler equations to find an optimal portfolio for an aggregate of investors under one-size-fits-all constraints. Using a dynamic portfolio choice model to design balanced default funds for 72 hypothetical industry pension plans, the average Euler equations depend on industry-specific per-capita earnings growth and moments of idiosyncratic earnings shocks. Inter-industry heterogeneity in moments of the joint distribution of earnings growth and the return on risky assets, including correlation and cokurtosis, explains the variation in optimal choice variables across industries.