Abstract

The beneficiaries of a corporate defined benefit pension plan in financial distress care about the security of their promised pensions. We propose to value the pension obligations of a corporate defined benefit plan using a discount rate that reflects the funding ability of the pension plan and its sponsoring company, and therefore depends, in part, on the chosen asset allocation. An optimal valuation is determined by a strategic asset allocation that is optimal given the risk premium a representative pension plan member demands for being exposed to funding risk. We provide an empirical application using the General Motors pension plan.

Publication Type:	Article
Additional Information:	This is the peer reviewed version of the following article: Inkmann, J., Blake, D. & Shi, Z. (2015). Managing Financially Distressed Pension Plans in the Interest of Beneficiaries. Journal of Risk and Insurance, which has been published in final form at https://dx.doi.org/10.1111/jori.12090. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Publisher Keywords:	strategic asset allocation, pension plan, default risk, liability, discount rate
Subjects:	H Social Sciences > HG Finance
Departments:	Cass Business School > Finance
URI:	http://openaccess.city.ac.uk/id/eprint/17142

Preview

Text - Accepted Version Download (313kB) | Preview

Export

Downloads