Defined Benefit Plans

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 36: October 18, 2007

Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Defined Benefit Plans
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T A B L E O F C O N T E N T S

"Risk Shifting Versus Risk Management: Investment Policy in
Corporate Pension Plans"
JOSHUA D. RAUH
University of Chicago - Graduate School of Business,
National Bureau of Economic Research (NBER)

"The Crisis in Corporate America: Private Pension Liability and
Proposals for Reform"
T. LEIGH ANENSON
University of Maryland Robert H. Smith School of
Business
KAREN EILERS LAHEY
University of Akron - Department of Finance

"Public Pension Liability: Why Reform is Necessary to Save the
Retirement of State Employees"
KAREN EILERS LAHEY
University of Akron - Department of Finance
T. LEIGH ANENSON
University of Maryland Robert H. Smith School of
Business

"The New Single-Employer Defined Benefit Plan Funding Rules:
What's in Store for Defined Benefit Plan Sponsors and
Participants?"
CHRISTOPHER E. CONDELUCI
Groom Law Group, Chartered

"Why Do Firms Offer Risky Defined Benefit Pension Plans?"
DAVID A. LOVE
Williams College - Department of Economics
PAUL A. SMITH
Federal Reserve Board of Governors
DAVID W. WILCOX
Federal Reserve Board - Division of Research and
Statistics

"Guaranteed Trouble: The Economic Effects of the Pension Benefit
Guaranty Corporation"
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)

"Another Bump in the Road: The Cash Balance Saga Never Ends"
ALVIN D. LURIE
Alvin D. Lurie, P.C., NYSBA
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"Risk Shifting Versus Risk Management: Investment Policy in
Corporate Pension Plans"
NBER Working Paper No. W13240

Contact: JOSHUA D. RAUH
University of Chicago - Graduate School of
Business, National Bureau of Economic Research
(NBER)
Email: jrauh@gsb.uchicago.edu
Auth-Page: http://ssrn.com/author=345896

Full Text: http://ssrn.com/abstract=999035

ABSTRACT: The asset allocation of defined benefit pension plans
is a setting where both risk shifting and risk management
incentives are likely be present. Empirically, firms with poorly
funded pension plans and weak credit ratings allocate a greater
share of pension fund assets to safer securities such as
government debt and cash, whereas firms with well-funded pension
plans and strong credit ratings invest more heavily in equity.
These relations hold both in the cross-section and within firms
and plans over time. The incentive to limit costly financial
distress plays a considerably larger role than risk shifting in
explaining variation in pension fund investment policy among U.S.
firms.
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"The Crisis in Corporate America: Private Pension Liability and
Proposals for Reform"
Journal of Labor and Employment Law, Vol. 9, No. 3, 2007

Contact: T. LEIGH ANENSON
University of Maryland Robert H. Smith School of
Business
Email: lanenson@rhsmith.umd.edu
Auth-Page: http://ssrn.com/author=859851

Co-Author: KAREN EILERS LAHEY
University of Akron - Department of Finance
Email: klahey@uakron.edu
Auth-Page: http://ssrn.com/author=17341

Full Text: http://ssrn.com/abstract=1021104

ABSTRACT: Popular and political concern about private pension
funds has been rampant in the last few years as companies declare
bankruptcy and terminate promised retirement benefits. Those
companies that remain viable have pension liabilities totaling in
the hundreds of billions of dollars. The federal insurance
program that protects pension benefits is also in jeopardy
causing political action in the passage of the Pension Protection
Act of 2006. This article contributes to the growing debate over
private pensions by analyzing the disastrous condition of private
pension funding and proposing two reforms. First, it concurs with
the recently enacted legislation that legitimate employer
transitions to the cash balance form of pension plan. Second,
contrary to the new statute, it suggests a reduction in insurance
benefits payable to participants of terminated plans and/or an
extension of the age of retirement to promote the continued
viability of the program. These proposals best accomplish ERISA's
primary purpose of pension protection as well as account for the
fundamental changes in the employment relationship that have
developed since its enactment.
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"Public Pension Liability: Why Reform is Necessary to Save the
Retirement of State Employees"
Notre Dame Journal of Law, Ethics and Public Policy, Vol.
21, No. 1, 2007

Author: KAREN EILERS LAHEY
University of Akron - Department of Finance
Email: klahey@uakron.edu
Auth-Page: http://ssrn.com/author=17341

Contact: T. LEIGH ANENSON
University of Maryland Robert H. Smith School of
Business
Email: lanenson@rhsmith.umd.edu
Auth-Page: http://ssrn.com/author=859851

Full Text: http://ssrn.com/abstract=1019843

ABSTRACT: The article contributes to the pension funding and
policy debate by analyzing and drawing conclusions for reform
from financial and actuarial data reported in the most
comprehensive study of public pension funds. Despite their
failing financial health and lack of federal government
oversight, public pensions have been largely ignored by the legal
community (but vigorously examined in the finance, economics, and
management disciplines). This article aims to spotlight the
funding problem of public pensions and generate ideas for legal
reform. Part I provides an overview of pension plans. It explains
what they are and how they work. Part II details the data in the
2005 study of state retirement systems and its troubling
implications. Part III proposes two reforms to the pension
paradigm: offering optional or exclusive defined contribution
plans and enacting mandatory uniform disclosure laws. The article
concludes that the degree of financial distress evidenced in the
recent public pension study confirms that reform is necessary to
save the retirement of state employees.
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"The New Single-Employer Defined Benefit Plan Funding Rules:
What's in Store for Defined Benefit Plan Sponsors and
Participants?"
Tax Management, Vol. 48, p. 59, February 19, 2007

Contact: CHRISTOPHER E. CONDELUCI
Groom Law Group, Chartered
Email: CEC@groom.com
Auth-Page: http://ssrn.com/author=866387

Abstract: http://ssrn.com/abstract=1014654

ABSTRACT: On August 17, 2006, President Bush signed into law the
Pension Protection Act of 2006 (the "Act"). In general, the Act
overhauled the single-employer and multiemployer defined benefit
plan funding rules, made a number of changes affecting defined
contribution plans, and made modifications to the prohibited
transaction and other fiduciary rules under the Employee
Retirement Income Security Act of 1974 ("ERISA"). Importantly,
the changes made by the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA") to tax-favored retirement
plans were made permanent.

While the Act included many changes to the pension laws, the main
driver behind these changes was the enactment of the new
single-employer defined benefit plan funding rules. In general,
effective for plan years beginning in 2008, the Act eliminates
the present law normal and deficit reduction contribution ("DRC")
funding rules, and replaces them with a new set of rules that
generally require plan sponsors to fund their plans up to 100
percent. Specifically, the Act enacted the new "minimum required
contribution rules," which requires a plan sponsor to make
contributions to its plans to cover benefits earned during the
year and to make up any underfunding over 7 years. Plan
liabilities will be determined based upon a modified, 3-segment
corporate bond yield curve prescribed by Treasury based on
investment grade corporate bonds with varying maturities and that
are in the top 3 quality levels (AAA, AA, and A ratings), using
2-year, unweighted averaging. The Act also enacted the "at-risk"
rules. In general, if a plan is "at-risk," the plan sponsor must
make greater contributions to the plan.

Under the Act, a plan sponsor may elect to maintain a "funding
standing carryover balance" (hereinafter referred to as "old
credit balance") and/or a "pre-funding balance" (hereinafter
referred to as "new credit balance"). Plan sponsors may generally
elect to use the plan's old and new credit balance to reduce its
minimum required contribution for the year. Unless the plan
sponsor elects to reduce the old and new credit balance, such
plan sponsors are required to reduce the plan's assets by these
balances for certain funding purposes.

The new rules also place limitations on (i) benefit increases,
(ii) benefit payments, (iii) benefit accruals, and (iv) the
payment of shutdown benefits if a plan is below a certain funded
threshold. Whether these restrictions apply is based on whether a
plan is 80% or 60% funded.

This article will further detail the newly enacted
single-employer defined benefit plan funding rules, and it will
highlight some of the reasons why the current defined benefit
plan funding rules were changed. In addition, the article will
briefly discuss the impact the new rules may have on the defined
benefit plan system and the retirement security of defined
benefit plan participants.
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"Why Do Firms Offer Risky Defined Benefit Pension Plans?"
FEDS Working Paper No. 2007-36

Author: DAVID A. LOVE
Williams College - Department of Economics
Email: dlove@williams.edu
Auth-Page: http://ssrn.com/author=548346

Contact: PAUL A. SMITH
Federal Reserve Board of Governors
Email: paul.a.smith@frb.gov
Auth-Page: http://ssrn.com/author=341316

Co-Author: DAVID W. WILCOX
Federal Reserve Board - Division of Research and
Statistics
Email: David.Wilcox@frb.gov
Auth-Page: http://ssrn.com/author=228

Full Text: http://ssrn.com/abstract=1019017

ABSTRACT: Even risky pension sponsors could offer essentially
riskless pension promises by contributing a sufficient level of
resources to their pension trust funds and by investing those
resources in fixed-income securities designed to deliver their
payoffs just as pension obligations are coming due. However,
almost no firm has chosen to fund its plan in this manner. We
study the optimal funding choice for plan sponsors by developing
a simple model of pension financing in which the total
compensation offered to workers must clear the labor market. We
find that if workers understand the implications of pension risk,
they will demand greater compensation for riskier pension
promises than for safer ones, all else equal. Indeed, in our
model, pension sponsors maximize their value by making their
pension promises free of risk. We close by positing some
explanations for why no real-world firm follows the prescription
of our model.
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"Guaranteed Trouble: The Economic Effects of the Pension Benefit
Guaranty Corporation"
NBER Working Paper No. W13438

Contact: JEFFREY R. BROWN
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: brownjr@uiuc.edu
Auth-Page: http://ssrn.com/author=155077

Full Text: http://ssrn.com/abstract=1016349

ABSTRACT: This paper examines the economic rationale for,
historical experience of, and current pressures facing the
Pension Benefit Guaranty Corporation (PBGC). The PBGC is the
government entity which partially insures participants in
private-sector defined benefit pension plans against the loss of
pension benefits in the event that the plan sponsor experiences
financial distress and has an under-funded pension plan. The
paper discusses three major flaws of the PBGC, namely, that 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.
The paper then discusses potential ways to reform the PBGC so
that it operates more in concert with basic economic principles.
______________________________

"Another Bump in the Road: The Cash Balance Saga Never Ends"
Business Entities, Vol. 9, No. 22, January/February 2007

Contact: ALVIN D. LURIE
Alvin D. Lurie, P.C., NYSBA
Email: isallurie@verizon.net
Auth-Page: http://ssrn.com/author=242846

Abstract: http://ssrn.com/abstract=1014607

ABSTRACT: After it seemed the world was safe again for cash
balance plans, in the wake of the 7th circuit's total
dismembering of the district court opinion in the IBM case from
which stemmed the 3-year halt in utilization of that plan
design), along came a district court decision in the Southern
District of New York, in the case of the J.P. Morgan Chase Cash
Balance Litigation, that less than three months later totally and
specifically rejected the 7th circuit's analysis and conclusion.
The author of this article, recognizing that such was the
prerogative of courts outside the territorial reach of the 7th
circiuit, nevertheless doubted that decision would be given such
short shrift, and predicted that, on appeal to the 2nd Circuit
Court, the Morgan case would surely be reversed, confident that
reason will prevail at the appellate level in New York no less
than it did in Chicago.