scholarly journals Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation

2008 ◽  
Vol 22 (1) ◽  
pp. 177-198 ◽  
Author(s):  
Jeffrey R Brown
Keyword(s):  
Interest Rates ◽  
Financial Distress ◽  
Information Disclosure ◽  
Pension System ◽  
Economic Effects ◽  
Pension Benefit ◽  
Sufficient Information ◽  
Defined Benefit ◽  
Pension Insurance ◽  
Pension Liabilities

How did the Pension Benefit Guaranty Corporation, a government corporation created to insure the pensions of workers and retirees in bankrupt firms, end up facing financial distress of its own? How did an organization designed to strengthen retirement security come to be seen as contributing to retirement insecurity? The superficial answer is that the PBGC's current funding problem arises from the decline in stock market prices in 2000, which reduced pension assets, and the fall in interest rates at about the same time, which boosted the present value of pension liabilities. But more fundamentally, much of the blame for the poor financial state of the PBGC, as well as the defined benefit system more generally, lies in some major design flaws of the PBGC pension insurance program. Specifically, the PBGC has: 1) failed to properly price insurance and thus encouraged excessive risk-taking by plan sponsors; 2) failed to promote adequate funding of pension obligations; and 3) failed to promote sufficient information disclosure to market participants. Together, these three flaws produced a system in which many firms fail to adequately fund their pension obligations, knowing that in financial distress, they can dump their pension liabilities onto the PBGC. Though the Pension Protection Act of 2006 made some progress in improving the PBGC program, it failed to correct these three major problems fully. Absent further reform, substantial problems will continue to plague the private defined benefit pension system in decades to come. To prevent this deterioration, this paper concludes that Congress should transfer much of the responsibility for defined benefit pension insurance to compulsory private markets.

Overviewing the findings: the Technical Panel Review of the Pension Insurance Modeling System

2014 ◽  
Vol 14 (2) ◽  
pp. 115-124 ◽  
Author(s):  
OLIVIA S. MITCHELL
Keyword(s):  
Interest Rates ◽  
Hedge Funds ◽  
Value At Risk ◽  
Private Equity ◽  
Commercial Real Estate ◽  
Conditional Value At Risk ◽  
Pension Benefit ◽  
List Type ◽  
Defined Benefit ◽  
Pension Insurance

AbstractThe Pension Benefit Guaranty Corporation's (PBGC) Pension Insurance Modeling System (PIMS) is used to evaluate the financial security and resilience of the national program backstopping private defined benefit plans. The Pension Research Council of the Wharton School at the University of Pennsylvania recently convened a Technical Review Panel of experts to review key inputs, outputs, and model assumptions. Our review was intended to provide a formal evaluation of the technical adequacy of the model by outside experts. The papers herein summarize views of each expert on this project. Key findings are as follows: •The PIMS models are an important and valuable tool in modeling the Pension Benefit Guaranty Corporation's liability risk. To the best of our knowledge, there is no other model that can do a comparable job.•Nevertheless, some improvements could be integrated in the Agency's approach to modeling. Those deserving highest priority attention, in the experts’ view, include incorporating systematic mortality risk (i.e., treat mortality and longevity as stochastic variables); including new asset classes increasingly found in defined benefit plan portfolios (e.g., commercial real estate, private equity funds, infrastructure, hedge funds, and others); developing a more complex model for the term structure of interest rates; and incorporating an option value approach to pricing the insurance provided.•The Agency could also do more to communicate the range of uncertainty and potential for problems associated with the PBGC's financial status. This could include additional information including the conditional value-at-risk, and perhaps an ‘intermediate,’ ‘optimistic’, and ‘pessimistic’ set of projected outcomes, as well as the expected ‘date of exhaustion’ for assets backing pension benefits insured by the PBGC.

scholarly journals Evaluating pension insurance pricing

2015 ◽  
Vol 14 (2) ◽  
pp. 186-201 ◽  
Author(s):  
DAVID F. BABBEL
Keyword(s):  
Credit Risk ◽  
Interest Rates ◽  
Term Structure ◽  
Ad Hoc ◽  
Corporate Bond ◽  
System Model ◽  
Pension Benefit ◽  
Investment Management ◽  
Pension Insurance ◽  
Insurance Pricing

AbstractThe Pension Benefit Guaranty Corporation's (PBGC) Pension Insurance Modeling System model has taken on the Herculean task of modeling in detail and under many scenarios the cash outflows associated with the pension obligations, they have assumed. This paper's comments are focused almost entirely upon the PBGC's termination liabilities, and address four pressing issues: (1) the need to discount the liability stream by current riskless interest rates instead of using corporate bond rates that reflect credit risk, call risk, and other risks, or using some ad hoc prescribed average of past rates; (2) the need to use a term structure of interest rates; (3) the need to employ more useful investment management benchmarks; and (4) how to implement a relevant and rigorous liability benchmark.

Pension Reform Options in Hong Kong

2018 ◽  
Vol 29 (2) ◽  
pp. 245-258
Author(s):  
Che Cheong Poon ◽  
Fuk Kin Joe Wong
Keyword(s):  
Hong Kong ◽  
Interest Rates ◽  
Pension System ◽  
Pension Reform ◽  
Average Length ◽  
Pension Plan ◽  
Defined Benefit ◽  
System Research ◽  
Retirement Benefit ◽  
The Government

This article argues for the establishment of a defined benefit and partially funded universal pension system. The characteristics of this system represent a publicly managed mandatory contributory pension plan and the coverage of its benefits for all Hong Kong elderly aged above 65. By applying a mathematical model which links up the periodic savings during people’s working life, level of interest rates, average length of time in retirement, and the amount of retirement benefit payments, we calculated the possible scenarios for Hong Kong to reform its pension system. Research results suggest that the proposed system will be financially viable and sustainable provided both the government and its citizens are willing to pay for it.

Individual Account Pension Actuarial Model under Fixed Interest Rates

2014 ◽  
Vol 556-562 ◽  
pp. 6556-6560
Author(s):  
Nian Nian Jia ◽  
Xue Zhao ◽  
Liu Yang
Keyword(s):  
Interest Rates ◽  
Pension System ◽  
Population Aging ◽  
Joint Modeling ◽  
Standard Wiener Process ◽  
Pension Insurance ◽  
Individual Account ◽  
Personal Accounts ◽  
The Impact ◽  
Actuarial Model

In the context of the global population aging, pension issue has become highly important and pressing national concerns. Therefore, to further improve and perfect pension system, especially for the pension insurance system, has a very important social value. From the following aspects of old-age insurance personal accounts actuarial model: The first, deduced fixed interest rate, monthly payment of personal accounts pension actuarial model; the second, taking into account the impact of different factors on interest rates, constructed in the form of joint modeling standard Wiener process and Poisson process personal accounts pension actuarial model formula is derived.

Policy will strain the German pension system

2018 ◽  
Keyword(s):  
Interest Rates ◽  
Pension System ◽  
Pension Reform ◽  
Government Policies ◽  
Occupational Pension ◽  
Content Type ◽  
Low Interest Rates ◽  
Old Age Poverty ◽  
The Government ◽  
Pension Liabilities

Subject Germany’s pension system. Significance The pension system is under increasing pressure from demographic change, low interest rates and generous government policies. Impacts Increasing tax liabilities on pension incomes could increase the prevalence of old-age poverty. Rising pension liabilities in the occupational pension pillar could dampen business investment in years ahead. The question of pension reform could be the undoing of the government when the coalition parties meet to evaluate their work in late 2019.

scholarly journals Economic and financial approaches to valuing pension liabilities

2015 ◽  
Vol 14 (2) ◽  
pp. 144-150 ◽  
Author(s):  
ROBERT NOVY-MARX
Keyword(s):  
Decision Making ◽  
Discount Rate ◽  
Cash Flows ◽  
Point Of View ◽  
Investment Policy ◽  
Rate Of Return ◽  
Pension Benefit ◽  
Defined Benefit ◽  
Present Value ◽  
Pension Liabilities

AbstractFinancial economics holds that payment streams should be valued using discount rates that reflect the cash flows’ risks. In the case of pension liabilities, the appropriate discount rate for a pension fund's liabilities is the expected rate of return on a portfolio that would be held under a liability-driven investment policy. The valuation of defined benefit pension obligations involves choices revolving around deciding: (1) what future benefit payments to recognize today (i.e., which liability concept to use); and (2) from whose point of view to value the liabilities. Moving towards modeling, the distribution of future liabilities using a ‘risk-neutral’ framework, would allow for calculating the present value of the future liabilities more accurately. This would provide policymakers with information more relevant for the decision-making, and it would also permit easier communication of the risks facing the Pension Benefit Guaranty Corporation's PIMS model via a single univariate statistic.

scholarly journals Joint risk of DB pension underfunding and sponsor termination: incorporating option-based projections and valuations into PIMS

2015 ◽  
Vol 14 (2) ◽  
pp. 172-185 ◽  
Author(s):  
DEBORAH LUCAS
Keyword(s):  
Joint Distribution ◽  
Current Model ◽  
Pension Plan ◽  
Cash Flows ◽  
Pension Benefit ◽  
Defined Benefit ◽  
Pension Insurance ◽  
Financial Position ◽  
Private Pension Plan ◽  
The Difference

AbstractWhen 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.

scholarly journals Measuring and explaining pension system risk

2015 ◽  
Vol 14 (2) ◽  
pp. 161-171 ◽  
Author(s):  
FRANK J. FABOZZI
Keyword(s):  
Pension System ◽  
Investment Policy ◽  
Pension Benefit ◽  
Pension Insurance ◽  
Investment Performance ◽  
Starting Point ◽  
The Usa ◽  
System Risk

AbstractWe discuss pension system risk in the USA, focusing on the investment policy and the methodology for the valuation of the liabilities of the Pension Benefit Guaranty Corporation (PBGC). We offer suggestions as to how the PBGC should consider modifying the Pension Insurance Modeling System. The issues of investment policy and liability valuation are not two distinct topics. As emphasized here, the proper valuation of liabilities provides a benchmark for the PBGC to use as a starting point for the establishment of its investment policy and then for assessing investment performance.

Economic effects of monetary policy in Russia: What do large datasets tell us?

2020 ◽  
pp. 31-53 ◽  
Author(s):  
Anna A. Pestova ◽  
Natalia A. Rostova
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Activity ◽  
Global Financial Crisis ◽  
Exchange Rate Regime ◽  
Aggregate Demand ◽  
Economic Effects ◽  
Theoretical Concepts ◽  
Empirical Estimates

Is the Bank of Russia able to control inflation and, at the same time, manage aggregate demand using its interest rate instruments? In other words, are empirical estimates of the effects of monetary policy in Russia consistent with the theoretical concepts and experience of advanced economies? This paper is aimed at addressing these issues. Unlike previous research, we employ “big data” — a large dataset of macroeconomic and financial data — to estimate the effects of monetary policy in Russia. We focus exclusively on the period after the 2008—2009 global financial crisis when the Bank of Russia announced the abandoning of its fixed ruble exchange rate regime and started to gradually transit to an interest rate management. Our estimation results do not confirm standard responses of key economic activity and price variables to tightening of monetary policy. Specifically, our estimates do not reveal a statistically significant restraining effect of the Bank of Russia’s policy of high interest rates on inflation in recent years. At the same time, we find a significant deteriorating effect of the monetary tightening on economic activity indicators: according to our conservative estimates, each of the key rate increases occurred in March and December 2014 had led to a decrease in the industrial production index by about 0.2 percentage points within a year.

Measuring Pension Liabilities under GASB Statement No. 68

2014 ◽  
Vol 28 (3) ◽  
pp. 421-454 ◽  
Author(s):  
John W. Mortimer ◽  
Linda R. Henderson
Keyword(s):  
Financial Reporting ◽  
Risk Index ◽  
Pension Plans ◽  
Low Risk ◽  
Sensitivity Analyses ◽  
Fiscal Year ◽  
Defined Benefit ◽  
Discount Rates ◽  
Risk Rate ◽  
Pension Liabilities

SYNOPSIS While retired government employees clearly depend on public sector defined benefit pension funds, these plans also contribute significantly to U.S. state and national economies. Growing public concern about the funding adequacy of these plans, hard hit by the great recession, raises questions about their future viability. After several years of study, the Governmental Accounting Standards Board (GASB) approved two new standards, GASB 67 and 68, with the goal of substantially improving the accounting for and transparency of financial reporting of state/municipal public employee defined benefit pension plans. GASB 68, the focus of this paper, requires state/municipal governments to calculate and report a net pension liability based on a single discount rate that combines the rate of return on funded plan assets with a low-risk index rate on the unfunded portion of the liability. This paper illustrates the calculation of estimates for GASB 68 reportable net pension liabilities, funded ratios, and single discount rates for 48 fiscal year state employee defined benefit plans by using an innovative valuation model and readily available data. The results show statistically significant increases in reportable net pension liabilities and decreases in the estimated hypothetical GASB 68 funded ratios and single discount rates. Our sensitivity analyses examine the effect of changes in the low-risk rate and time period on these results. We find that reported discount rates of weaker plans approach the low-risk rate, resulting in higher pension liabilities and creating policy incentives to increase risky assets in pension portfolios.

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