Does Surplus Sharing Increase Risk-Taking in a Corporate Defined Benefit Pension Plan?

44 Pages Posted: 9 Oct 2012 Last revised: 7 Nov 2013

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

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

Date Written: October 17, 2013

Abstract

This paper studies the surplus-sharing effects on the risk-taking of a corporate defined benefit (DB) pension plan. The focus is on the influence of the participants’ proportion of surplus and of the relative weight of equityholders to participants. We prove that participants’ risk-taking increases due to surplus sharing and when decreasing the participants’ proportion of surplus. Numerical results show that surplus sharing makes also equityholders less risk averse and that equityholders’ risk-taking in general increases when increasing the participants’ proportion of surplus. We prove that, in the portfolio considering both participants’ and equityholders’ interests, increasing the weight of equityholders to participants decreases risk-taking when the participants’ proportion of surplus or the funding level is low. The numerical analysis also shows that conflicts of interest between participants and equityholders are common and that in order to ensure that the plan’s risk-taking is never very high, the relative weight of equityholders to participants should be high.

Keywords: defined benefit pension plan, surplus sharing, risk-taking, participants, equityholders

JEL Classification: C61, D86, G11, G13, G23

Suggested Citation

Romaniuk, Katarzyna, Does Surplus Sharing Increase Risk-Taking in a Corporate Defined Benefit Pension Plan? (October 17, 2013). Available at SSRN: https://ssrn.com/abstract=2159416 or http://dx.doi.org/10.2139/ssrn.2159416

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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