Pension Deficits: An Unnecessary Evil

摘要

Failing equity markets and interest rates have devastated pension plans worldwide during the past several years. The S&P 500 Index companies enjoyed a collective pension surplus of $250 billion in 1999. Even after the 2003 market rally, they face a deficit of $168 billion in 2003 (Bianco, Deng, and Suri 2004). These circumstances spotlight the weakness of current funding and investment practices for corporate defined-benefit pension plans. This article presents a case for securing all accrued benefits through full funding. "Full funding" is commonly understood to mean that assets are sufficient to cover liabilities measured at an arbitrary discount rate, with no consideration of how the assets are invested. Here, I use "full funding" to signify a much stronger funding condition, one in which an immunizing bond portfolio secures all benefits to which employees would be entitled upon service termination. The combination of sufficient assets and an immunization strategy eliminates dependence on the creditworthiness of the pension sponsor. Furthermore, the sponsor commits not to undermine that security by changes in investment or funding policy, by plan amendments that are not immediately funded, or by plan mergers or spin-offs. I discuss pension funding initially in the absence of governmental guarantees because most countries lack guarantees and because this approach yields insights that are useful in evaluating guarantee programs.