Valuing Defined-Benefit Plans
Williams W Jennings and William Reichenstein
ABSTRACT
We examine issues surrounding the valuation of defined-benefit pension
plans including benefit formulas, integration with Social Security, post-retirement
benefit increases and default risk. We obtain a reasonable valuation with three
key esitmates – the level of retirement benefits, the growth rate of post-retirement
benefits and the discount rate. We consider the PBGC guarantee afforded many
DB pensions. Usually, benefits are essentially default-risk free, and the discount rate
can be based on Treasury yields. We also offer methodological advances over
current approaches. DB valuation is crucially relevant to asset allocation decisions
and has litigation implications