The Influence Of Defined Benefit Plans On Equity Risks And Prices
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The Influence Of Defined Benefit Plans On Equity Risks And Prices
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Author : Kunal Rawal
language : en
Publisher:
Release Date : 2014
The Influence Of Defined Benefit Plans On Equity Risks And Prices written by Kunal Rawal and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This paper examines whether the systematic equity risk of German companies, measured by beta from Capital Asset Pricing Model (CAPM), reflects the risk of defined benefit pension plans sponsored by the companies. The possible reasons why pension risk does not get incorporated into company valuations could be low disclosure norms, off balance sheet reporting of pension liabilities and opaque set of accounting rules that govern these issues. In the aftermath of an era of low interest rates and declining returns on equity markets, the pension plans deficit have soared due to increase in liability on one hand and lower valuation of pension assets on the other. Pension plan deficits can be detrimental to company's financial health thereby, impacting its equity valuation and credit ratings, jeopardizing its very existence. This paper also highlights the implication of pension plan on capital budgeting decision making process. As it turns out, ignoring the value as well as risk of pension plans can push up the cost of capital which feeds into discount rates used to estimate projects net present value. This paper advices on the changes that need to be made to standard procedure of WACC calculation to accommodate pension plan and take an integrated approach towards corporate finance decision making process. The empirical finding also highlights the direct relationship between firm risk and pension risk, although the results were curtailed due to unavailability of large cross sectional and panel data.
The Effect Of The Funding Status Of Defined Benefit Pension Plans On Tax Avoidance And Investment Efficiency
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Author : Neeru Chaudhry
language : en
Publisher:
Release Date : 2015
The Effect Of The Funding Status Of Defined Benefit Pension Plans On Tax Avoidance And Investment Efficiency written by Neeru Chaudhry and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
The objective of this thesis is to understand the complex nature of defined benefit (DB) pension plans offered by private employers in U.S. and to examine its impact on firms' tax avoidance behaviour and investment efficiency. DB pension plans are important because of the economic size and the impact they have on firm's free cash flow. These pension plans are associated with high information asymmetry arising from the complex financial reporting and changing regulatory environment. This complexity makes it difficult for investors to estimate the true impact of pension liabilities on firm's performance. It also provides opportunities to managers to exploit information asymmetry for making decisions, which may not be in the best interest of shareholders. This thesis investigates two such issues related to DB plans. The first empirical study examines whether the decline in the funding of pension plans is associated with more tax avoidance. Results reveal that firms engage in more tax avoidance as the size of pension deficit (defined as pension liabilities less pension assets scaled by total assets) increases. Specifically, I find that one standard deviation increase in pension deficit is associated with annual tax savings of approximately $3.7 million. This positive relation between pension deficit and tax avoidance is not driven by financially constrained firms, loss-making firms or firms with foreign operations. The results hold after controlling for board characteristics and CEO equity risk incentives. The observed relation between pension deficit and tax avoidance is robust to alternative variable definitions and model specifications.In the second empirical study, I investigate whether the flexibility in making pension contributions and high information asymmetry associated with pension plans motivate managers to over-invest. The empirical analysis reveals that firms invest more at higher levels of pension deficit. Specifically, I find that at the median level (90th percentile) of pension deficit, investment increases by 6.7 cents (9.3 cents), for each dollar increase in cash. Furthermore, I find that as pension deficit increases, firms' invest more than the predicted investment level. Results show that the market values an additional dollar lower than $1 as pension deficit increases, indicating that shareholders anticipate that some of the value is lost because managers will waste cash by investing in negative net present value projects. Collectively, these findings provide evidence that increased investment more likely represents over-investment by managers. I find that the results are robust to alternative variable definitions, alternative model specifications and endogeneity concerns that may arise if managers decide investment jointly with the funding policy of pension plans and firm's target cash level.This thesis documents that the decline in the funding of pension plans is positively associated with tax avoidance and over-investment. The findings from the two empirical studies provide evidence that higher pension deficit firms are likely to have more agency problems and managers may be motivated to engage in activities that reduce firm value.
Pension Fund Risk Management
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Author : Marco Micocci
language : en
Publisher: CRC Press
Release Date : 2010-01-25
Pension Fund Risk Management written by Marco Micocci and has been published by CRC Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010-01-25 with Business & Economics categories.
As pension fund systems decrease and dependency ratios increase, risk management is becoming more complex in public and private pension plans. Pension Fund Risk Management: Financial and Actuarial Modeling sheds new light on the current state of pension fund risk management and provides new technical tools for addressing pension risk from an integr
Reform Options For Mature Defined Benefit Pension Plans The Case Of The Netherlands
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Author : Mr.Marc Gerard
language : en
Publisher: International Monetary Fund
Release Date : 2019-01-25
Reform Options For Mature Defined Benefit Pension Plans The Case Of The Netherlands written by Mr.Marc Gerard and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-01-25 with Business & Economics categories.
The Netherlands has been operating fully funded, defined benefit second pillar pension schemes that have consistently ranked high worldwide for delivering high replacement rates while featuring strong solidarity among members. Yet the long-term sustainability of the Dutch pension funds has been undermined in recent years by protracted low interest rates and unfavorable demographic developments, exacerbating controversies over intergenerational transfer mechanisms within the plans. This has prompted a national debate over ways to move toward more individualization while preserving financial security at retirement for all. This paper draws on this experience, illustrated by stress testing simulations and assessed vis-à-vis solutions implemented in peer countries, to discuss the main policy trade-offs associated with the reform of mature pension systems in advanced economies.
An Analysis Of Risk Taking Behavior For Public Defined Benefit Pension Plans
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Author : Nancy Mohan
language : en
Publisher:
Release Date : 2012
An Analysis Of Risk Taking Behavior For Public Defined Benefit Pension Plans written by Nancy Mohan and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with Civil service categories.
This paper investigates the determinants of public pension plan risk-taking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and beta. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing financial constraints allocate more assets to equity and have higher pension asset betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds. Finally, the results offer mild support of a public union effect.
A Lifecycle Analysis Of Defined Benefit Pension Plans
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Author : David McCarthy
language : en
Publisher:
Release Date : 2008
A Lifecycle Analysis Of Defined Benefit Pension Plans written by David McCarthy and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
This paper employs a lifecycle model from the consumption-savings literature to examine the tradeoffs between defined benefit and defined contribution pension plans. We examine the effects of varying risk aversion, varying initial income and financial wealth, and varying wage processes (that may be correlated with returns on the risky asset). Results indicate that wage-indexed claims are not an optimal vehicle for retirement policy if the decision to participate is made early in life, because individuals hold most of their wealth in their human capital and would not wish to increase their exposure to income shocks. Later in life, after most of a worker's human capital has been converted to financial assets, defined benefit pension plans help increase diversification by reducing exposure to financial market risk. The access that defined benefit plans provide to annuities markets and possible guaranteed rates of return over the risk-free rate increase the value of defined benefit plans to workers. The model also predicts that wage-indexed claims will be more valuable when equity markets provide low expected returns or are highly variable and when annuity markets are inefficient. The model illustrates two economic functions performed by defined benefit plans. Firstly, DB plans pool individual wage risks. This allows older workers to buy a wage-linked security that increases their exposure to wage risks. Secondly, they create a group annuities market that reduces the cost of adverse selection.
How The Financial Crisis Affects Pensions And Insurance And Why The Impacts Matter
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Author : Gregorio Impavido
language : en
Publisher: International Monetary Fund
Release Date : 2009-07
How The Financial Crisis Affects Pensions And Insurance And Why The Impacts Matter written by Gregorio Impavido and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009-07 with Business & Economics categories.
We use a calibrated multi-sector DSGE model to analyze the likely impact of oil windfalls on the Ghanaian economy, under alternative fiscal and monetary policy responses. We distinguish between the short-run impact, associated with demand-related pressures, and the medium run impact on competitiveness and growth. The impact on inflation and the real exchange rate could be moderate, especially if the fiscal authorities smooth oil-related spending or increase public spending's import content. However, a policy mix that results in both a fiscal expansion and the simultaneous accumulation of the foreign currency proceeds from oil as international reserves to offset the real appreciation would raise demand pressures and crowd-out the private sector. In the medium term, the negative impact on competitiveness resulting from "Dutch Disease" effects could be small, provided public spending increases the stock of productive public capital. These findings highlight the role of different policy responses, and their interaction, for the macroeconomic impact of oil proceeds.
Risk Management And The Pension Fund Industry
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Author : International Monetary Fund. Monetary and Capital Markets Department
language : en
Publisher: International Monetary Fund
Release Date : 2004-10-14
Risk Management And The Pension Fund Industry written by International Monetary Fund. Monetary and Capital Markets Department and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004-10-14 with Business & Economics categories.
This paper looks at the longer-term challenges pension funds face as population age and key issues to address to enhance their risk management practices and their role as long-term investors. The paper focuses primarily on Japan, the Netherlands, Switzerland, the United Kingdom, and the United States, where funded pension plans are most developed. The size of pension savings in these countries, their projected growth, and the recent development of funded pension schemes in other countries highlight the fast-growing importance of pension funds for international capital markets and to financial stability.
Downside Risk Management Of A Defined Benefit Plan Considering Longevity Basis Risk
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Author : Yijia Lin
language : en
Publisher:
Release Date : 2014
Downside Risk Management Of A Defined Benefit Plan Considering Longevity Basis Risk written by Yijia Lin and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
To control downside risk of a defined benefit (DB) pension plan arising from unexpected mortality improvements and severe market turbulence, this paper proposes an optimization model by imposing two conditional value at risk (CVaR) constraints to control tail risks of pension funding status and total pension costs. With this setup, we further examine two longevity risk hedging strategies subject to basis risk. While the existing literature suggests that the excess-risk hedging strategy is more attractive than the ground-up hedging strategy as the latter is more capital intensive and expensive, our numerical examples show that the excess-risk hedging strategy is much more vulnerable to longevity basis risk, which limits its applications for pension longevity risk management. Hence, our findings provide important insight on the effect of basis risk on longevity hedging strategies.
The Effect Of Objective Functions On Investment And Contribution Decisions For Defined Benefit Pension Schemes
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Author : Adam Butt
language : en
Publisher:
Release Date : 2016
The Effect Of Objective Functions On Investment And Contribution Decisions For Defined Benefit Pension Schemes written by Adam Butt and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
This paper examines the effect of objective function structures on the optimal management decisions (in particular, asset allocation and surplus/deficit spread period) for a model defined benefit superannuation scheme. The objectives of employer-sponsors, members and trustees are identified, with three risks being quantified and incorporated into different objective functions as used in previous studies. These are contribution rate risk, excess contribution rate risk and funding level risk. Simulation of a model scheme which is closed to new entrants is carried out to generate numerical values for the risks and consequently a single value from the range of different objective functions observed in the literature. Investigation of whether consistency exists between various objective functions in terms of optimal strategies is undertaken. It is found that there are considerable variations in the optimal decisions derived from each objective function, based on the same set of simulated outcomes. These variations are up to 87% in equity allocation and 14 years of surplus/deficit spread period. Such variations can be explained by either the risks that are considered or the way that the risks are measured. Further analysis is then undertaken of the impact of weighting parameter values on the optimal decisions with this analysis discovering that some of the objective functions tested are not appropriate for the investigation being undertaken. An overall outcome of the paper is the confirmation that it is vital to choose the most appropriate objective function based on the function's characteristics and on the particular circumstances of the defined benefit scheme, in order to ensure that the optimal decisions are made for the scheme.