Joint risk of DB pension underfunding and sponsor termination: incorporating option-based projections and valuations into PIMS
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Lucas_Joint risk.pdf
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326.11 KB
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Checksum (MD5)
4b02b922892f5f882225490dc3c243fa
Author(s)
Lucas, Deborah J.
Date Issued
April 2015
Journal
Journal of Pension Economics and Finance
Publisher
Cambridge University Press
Citation
Lucas, Deborah. “Joint Risk of DB Pension Underfunding and Sponsor Termination: Incorporating Option-Based Projections and Valuations into PIMS.” Journal of Pension Economics and Finance 14, no. 02 (April 2015): 172–85.
Version
Original manuscript
Abstract
When a private pension plan sponsor with an underfunded plan becomes insolvent, the difference between the value of the plan's assets and its termination liabilities represents a liability for the Pension Benefit Guaranty Corporation (PBGC). Hence, accurately modeling the joint statistical distribution over time of defined benefit pension underfunding and sponsor terminations is critical for estimating PBGC's prospective cash flows and evaluating its financial position. It appears that the current Pension Insurance Modeling System (PIMS) approach to modeling risk does a reasonable job of capturing its statistical properties effects on PBGC cash flows, although some of the aspects might be improved, and metrics expanded. The present paper outlines, how an option-based approach to modeling the joint distribution of defaults and underfunding in PIMS might be implemented, while preserving the strengths of the current model. Moving to an option-based approach would allow PIMS to be used to estimate the fair values of future liabilities. Such an approach could have a significant effect on the perceived financial position of PBGC.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1017/s1474747214000444
