Portfolio Restriction to Impose on Defined Benefit Pension Plans

36 Pages Posted: 19 Jan 2012 Last revised: 14 Apr 2012

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

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

Date Written: January 18, 2012


When a firm sponsoring a defined benefit pension plan approaches financial distress, the Pension Benefit Guaranty Corporation (PBGC) insurance effect materializes and the optimal pension portfolio policy becomes aggressive. In this configuration, a regulation restricting the pension investment strategy is needed. We suggest that the restriction imposed should follow asset-liability management principles. A low risk investment policy, as defined by the preference-independent liability hedge only, should be the regulator's benchmark. We recommend that the risky asset proportion maximum limit is fixed at 30%.

Keywords: defined benefit pension plan, distress, PBGC, regulation, portfolio restriction, liability hedge

JEL Classification: C61, G11, G22, G23, G28

Suggested Citation

Romaniuk, Katarzyna, Portfolio Restriction to Impose on Defined Benefit Pension Plans (January 18, 2012). Available at SSRN: https://ssrn.com/abstract=1988246 or http://dx.doi.org/10.2139/ssrn.1988246

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005

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

111 Renai Road, SIP
Suzhou, JiangSu province 215123

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