Don't kill the golden goose! saving pension plans

Deskripsi

Defined-benefit (DB) pension plans are an endangered species; they are perceived as too risky and costly. But the emerging substitute, the defined-contribution plan, has many shortcomings. The risk of DB plans can be controlled, first, by modeling the liability in terms of its market-factor exposures through surplus (asset minus liability) optimization. Then, sponsors may hold the minimum-risk position (a liability-defeasing portfolio) or move up on the efficient frontier--taking equity and other risks. The economic cost of a DB plan also needs to be managed, but it is a matter of managing the size of the pension promise; it is not an asset allocation problem.