Optimal Corporate Pension Policy: A Unified Framework

40 Pages Posted: 4 Oct 2011 Last revised: 11 Jun 2012

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

Université de Paris 1 Panthéon-Sorbonne; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: September 30, 2011

Abstract

This paper develops a general continuous-time framework for defining optimal corporate pension policy. Interactions between the firm's optimal investment and financing policies and the defined benefit pension plan optimal portfolio strategy are studied. We prove that the three decision rules are driven by speculation and hedging motives, the latter concerning in each case both the pension plan and firm variables. We emphasize that in normal times the optimal pension portfolio rule from the equity holders' perspective is acceptable to both the participants and PBGC. Yet it is no longer the case when the firm approaches financial distress. The PBGC should then exert a much stronger control than today exerted on the sponsoring company to prevent the further deterioration of the Corporation's financial status.

Keywords: optimal corporate pension policy, optimal defined benefit pension plan portfolio, stochastic dynamic programming, equityholders, participants, Pension Benefit Guaranty Corporation, financial distress

JEL Classification: C61, D92, G11, G22, G23, G31, G32

Suggested Citation

Romaniuk, Katarzyna, Optimal Corporate Pension Policy: A Unified Framework (September 30, 2011). Available at SSRN: https://ssrn.com/abstract=1937186 or http://dx.doi.org/10.2139/ssrn.1937186

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005
France

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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