The PBGC Premium and the Pension Plan's Risk-Taking: Should the PBGC Take the PPF As an Example?

21 Pages Posted: 14 Feb 2018

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

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

Date Written: February 1, 2018

Abstract

This paper focuses on the way the PBGC premiums should be defined. In the current debate, a better risk adjustment is sought, and the PPF is given as an example. The paper analyzes the effect the PBGC premium form has on the sponsoring firm's risk-taking in its pension plan. We show that risk-taking increases (decreases) when the actual bankruptcy probability of the firm is higher (lower) than the proportion of underfunding taken into account in the premium. Numerical results suggest that if the PBGC increased the current underfunding proportion, risk-taking would be reduced, albeit slightly. The paper's conclusion is that adopting risk-adjusted premiums of the PPF-type is an advisable measure for the PBGC. The effect of the insurance contract on risk-taking would be then eliminated. However, whatever the premium form, the problem of firms in financial trouble will remain unsolved, and other measures than risk-adjusted premiums are needed to prevent their risk-seeking behavior.

Keywords: pension insurance; premium; risk adjustment; moral hazard; risk-taking; PBGC; PPF

JEL Classification: G22; G23; G28

Suggested Citation

Romaniuk, Katarzyna, The PBGC Premium and the Pension Plan's Risk-Taking: Should the PBGC Take the PPF As an Example? (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=3116548 or http://dx.doi.org/10.2139/ssrn.3116548

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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