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  1. 2 Kozgazdasagi Szemle (Economic Review)

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  1. 2 Moricz D.

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  1. 1 2006

  2. 1 2004

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1

Corporate pension liabilities and risk of stocks - leverage and cross-holding.

100%
Moricz D.
Kozgazdasagi Szemle (Economic Review)
|
2006
|
vol. 53
|
issue 2
144-157
EN
The paper deals with corporate defined benefit pension plans and their effects on the risk of stocks. Within the assets of defined benefit pension plans, the ratio of stocks is usually high, while the benefits do not depend on the investment performance of the fund's assets. So through an increase of leverage and through a cross-holding effect (since the funds largely invest in the stocks of other sponsors), the performance of the pension fund's assets influences the value and risk of the stocks of the sponsoring company. The importance of this phenomenon became apparent due to the market trends in the first years of the new millennium, when falling interest rates appreciated the value of pension liabilities, while pension assets were hit by the poor performance of the stock market. It is demonstrated here in a CAPM-based model that the leverage and the cross-holding effect due to un-immunized benefit obligations of corporate defined-benefit pension plans may increase the volatility of the stock market, and may change the systematic risk of stocks and the proportion of the individual, non-diversifiable part within the total variance
2

Optimal investment and funding policy of US defined-benefit pension plans

100%
Moricz D.
Kozgazdasagi Szemle (Economic Review)
|
2004
|
vol. 51
|
issue 12
1113-1131
EN
The assets of private defined-benefit pension plans represent a significant proportion of the US retirement savings market and affect the share value of sponsoring companies. This paper gives an overview of the optimal pension investment (allocation of funds by asset class) and funding policy. Summarizing the literature, the author considers how to manage a defined-benefit pension plan in the light of tax considerations, insurance premiums payable to the Pension Benefit Guaranty Corporation, and corporate liability. The paper analyses market imperfections (transaction costs, financial distress, regulation etc.) that affect optimal funding level and asset allocation. The conclusion is drawn that companies have to tailor their pension policies to their individual circumstances. Instead of corner solutions, it is rational for most to fund their pension plans in a stable way, according to applicable laws and regulations, and to select a balanced (equity/bond) asset mix. Optimal pension investment and funding policy is dynamic and should evolve in line with changes in the sponsoring company's circumstances. This helps to explain the vertical and horizontal discrepancies in funding levels and asset allocations between different pension plans.
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