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DISCUSSION PAPER PI-0709

Managing Financially Distressed Pension Plans in the Interest of Beneficiaries

Joachim Inkmann and David Blake

The beneficiaries of a corporate defined benefit pension plan in financial distress care about the security of their promised pensions. We propose to value the pension obligations of a corporate defined benefit plan using a discount rate which reflects the funding ability of the pension plan and its sponsoring company, and therefore depends, in part, on the chosen asset allocation. An optimal valuation is determined by a strategic asset allocation of the pension plan assets which optimizes the funding risk exposure of a representative pension plan member. We provide an empirical application using the General Motors pension plan.

Key words: strategic asset allocation, pension plan, default risk, liability, discount rate