Shareholder-Optimal Design of Cash Balance Pension Plans

In 1980 and 1981, Fischer Black and Irwin Tepper showed that shareholders would gain if corporate defined benefit pension assets were invested in taxable fixed income securities instead of equities. This paper extends this analysis into the cash balance plan arena, concluding that additional shareholder gains arise when plan liabilities mimic equities. A numerical example demonstrates that the present value of riskless gains to shareholders can exceed the entire after-tax value of plan assets. Lack of transparency in actuarial methods and assumptions is shown to impede implementation

Post-employment Benefits, Economics and Accounting: Moral Hazard and Frail Benefit Designs

This paper uses economic principles to analyze alternative definitions for end-of-period liabilities under post-employment benefit plans; the candidates, using U.S. nomenclature, are the vested benefit obligation (VBO), the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO). In competitive employment markets with rational contracting we are unable to justify projected costing (PBO-based) for typical pay-related defined benefit plans. Projected costing misrepresents the economic obligations incurred by shareholders and invites moral hazard. Employee exposure to moral hazard may be minimized by exit costing (VBObased) which recognizes only those benefits to which an exiting employee is entitled under the explicit benefit contract. But exit costing may not fully inform shareholders about the obligations that they have incurred under implicit contracts that extend beyond the plan document. Accrued costing (represented in the U.S. by the ABO) may better measure shareholders’ economic commitments. Small differences between the ABO and the VBO may measure a human capital asset incented by delayed vesting and benefit eligibility. Large differences are a marker for frail benefit design and potential moral hazard. Moral hazard options exercised by employers disappoint employees and may lead to unwelcome ex-post results-oriented repairs imposed by legislators, regulators and courts

Risk Transfer in Public Pension Plans

Actuaries and sponsors of public sector defined benefit pension plans agree that each generation of taxpayers should bear its fair share of the long term plan cost. Actuarial methods and assumptions are designed to equate expected costs across generations. This paper uses arbitrage principles to show that equating expected costs unfairly lowers risk-adjusted costs for early generations and raises them for later generations. The use of expected rather than risk-adjusted returns on risky assets leads to sub-optimal asset allocations, granting of valuable options (skim funds), and costly financing strategies such as Pension Obligation Bonds

Assumed Rates of Discount for Valuations of Publicly Sponsored Defined Benefit Plans

Actuaries commonly, and in accordance with professional standards, use expected rates of return (on an anticipated asset mix) to discount the liabilities of defined benefit pension plans and to develop periodic plan expenses and contributions. With risky assets, the symmetry of returns about the expected return is deemed sufficient to develop costs that are unbiased over time. In the public (governmental) plan sector, expenses and contributions are almost always identical and intergenerational equity is a high priority. This paper uses arbitrage principles to show that the use of expected returns including equity premia is biased in favor of early generations at the expense of later generations, a wealth transfer disguised as risk diversification over time. It is shown that unbiased results can be developed, with no wealth transfers between generations, by assuming risk-free rates of return independently of the actual asset mix. Because cost computations anticipate equity premia, governments are likely to offer their employees pension benefits and valuable options (Skim funds) at less than their risk-adjusted cost, and to enter into costly strategies such as the issuance of Pension Obligation Bonds (POB’s)

Accounting/Actuarial Bias Enables Equity Investment by Defined Benefit Pension Plans

Although pension finance theory says almost all defined benefit pension plans sponsored by publicly traded U.S. corporations should invest entirely in fixed income, 60% of assets are invested in equities. I offer a variation on the existing theory, removing the strong, but often unstated, assumption of transparency. The transparent (financial) model assumes that investors and managers view the pension plan as a portfolio of marketed assets and liabilities, a subsidiary of the operating parent, and subject to arbitrage. An opaque model holds that investors and managers view the plan in operating (accounting/actuarial) terms and value it based on earnings considerations. Defined benefit pension plans earnings (expense) are computed using actuarial methods and economic assumptions that systematically anticipate expected equity returns and strongly dampen the volatility of actual equity returns. Thus, corporations whose plans invest in equity overstate the financial value of their earnings and understate the volatility of such earnings. Under the transparent model, managers who invest in equities may be confronted by arbitrage arguments that show equity investment injures shareholders. Under the opaque model, these arbitrage arguments are not available and managers who invest in equities enjoy premium returns to risk while those who invest in fixed income are punished by higher costs with no apparent risk reduction

Family Distress, First-Generation College Status, and Financial Stress as Predictors of Alcohol Use in College Students Seeking Mental Health Treatment

Increasing numbers of students have been presenting for mental health treatment on college campuses to address their alcohol use (Gallagher, 2010). The goal of the current study was to examine the relationship between presenting alcohol use, family distress, college generational status (first-generation to college or non-first-generation to college), and financial distress. By examining the predictive nature of these variables screening could be improved to help identify and help students who are more at risk of experiencing the negative impact of alcohol use. It was hypothesized that higher levels of family distress, more financial stress, and being a first-generation college student would predict higher levels of alcohol use. The results that were obtained did not support this hypothesis. Conversely, first-generation college student status was negatively correlated to alcohol use, although the effect was small. Future research examining the relationship of first-generation college student status and risk factors will inform best practices and improve interventions and assessments with this population

Characterization of Trap Frequencies for Cold Atom Laboratory Bose-Einstein Condensates

With the recent production of Bose-Einstein condensates using NASA\u27s Cold Atom Laboratory (CAL) aboard the International Space Station, research is underway focusing on the extent to which quantum mechanics can be studied in a microgravity environment. These condensates have the potential to be the coldest ever studied in experiment and in free-fall their place in orbit allows us to observe them in long time-of-flights. This thesis reports fitting analyses and trap frequency characterization of imaging data from condensates in conventional magnetic potentials. This information will be used for the calibration and design of future experiments with CAL, regarding both conventional and radio-frequency dressed traps. Of particular interest to further study are ellipsoidal shell condensates and the quasi-two-dimensional condensate that exists on its surface in the limit of low shell thickness

The Case for Marking Public Plan Liabilities to Market

State and local U.S. pension plans hold an estimated $3 trillion in assets, with market values regularly disclosed in plan financial statements. By contrast, public defined benefit pension liabilities are routinely reported at actuarial values which may differ substantially from market values. We propose that a more accurate way to value plan liabilities measures the present value of accrued benefits discounted at market interest rates for fixed income investments that are (or are nearly) default-free. We illustrate the difference between these measures for a set of public sector pensions using publicly available information

The Case Against Stock in Public Pension Funds

A government has $1 million of stock in a pension fund that covers its employees. The liability can be matched with a$1-million dedicated bond portfolio. What are the consequences of shifting the pension fund from equities to bonds? The paragraph above duplicates the opening paragraph of The Case Against Stock in Corporate Pension Funds (Bader 2003), except that we have substituted a governmental plan for a corporate plan. Does this substitution matter