A Global Perspective on Financial Regulation
Edited by John Evans, Michael Orszag and John Piggott
10. Pricing Defined Benefit Pension Insurance David McCarthy and Anthony Neuberger 1. PENSION GUARANTEE FUNDS Concern about the security of occupational defined benefit pensions when sponsoring firms default on them has led to the establishment of pension guarantee funds in several countries. The largest and best established exemplar of a guarantee fund is the Pension Benefit Guaranty Corporation (PBGC) of the United States, which was introduced with the passage of the Employee Retirement Income Security Act (ERISA) in 1974 following some highly publicized pension defaults. The United Kingdom followed suit in 2004, when public concern about the security of defined benefit pensions led to the establishment of the Pension Protection Fund (PPF), which was largely modelled on the PBGC. The purpose of this chapter is to identify and quantify some of the main policy issues involved in the establishment and management of pension guarantee funds.1 One key issue is the solvency of these funds, and possible claims on the public purse. For instance, after a run of years of very low claims—claims averaged US$300 million per year over the period 1980–99—the PBGC faced very large claims in the period 2000–04, amounting to some US$21 billion in total. Its 2004 accounts show a deficit of US$23.3 billion, after probable claims from currently insured plans are taken into account. The total underfunding of US pension plans covered by the PBGC increased from less than US$30 billion in 1999 to more than US$450 billion...
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