Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans

31 Pages Posted: 19 Jun 2004 Last revised: 24 Jul 2022

See all articles by J. Michael Harrison

J. Michael Harrison

Stanford Graduate School of Business

William F. Sharpe

Stanford University - Graduate School of Business

Date Written: July 1982

Abstract

This paper considers a world in which pension funds may default, the cost of the associated risk of default is not borne fully by the sponsoring corporation, and there are differential tax effects. The focus is on ways in which the wealth of the shareholders of a corporation sponsoring a pension plan might be increased if the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) follow simple and naive policies. Under the conditions examined, the optimal policy for pension plan funding and asset allocation is shown to be extremal in a certain sense. This suggests that the IRS and the PBGC may wish to use more complex regulatory procedures than those considered in the paper.

Suggested Citation

Harrison, J. Michael and Sharpe, William F., Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans (July 1982). NBER Working Paper No. w0935, Available at SSRN: https://ssrn.com/abstract=300718

J. Michael Harrison

Stanford Graduate School of Business ( email )

655 Knight Way
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William F. Sharpe (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-4876 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://www.wsharpe.com

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