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DISCUSSION PAPER PI-0709

Managing Financially Distressed Pension Plans In the Interest of Beneficiaries

Joachim Inkmann, David Blake and Zhen Shi

The beneficiaries of a corporate defined benefit pension plan in financial distress care about the security of their promised pensions. We propose to value the pension obligations of a corporate defined benefit plan using a discount rate which reflects the funding ability of the pension plan and its sponsoring company, and therefore depends, in part, on the chosen asset allocation. An optimal valuation is determined by a strategic asset allocation which is optimal given the risk premium a representative pension plan member demands for being exposed to funding risk. We provide an empirical application using the General Motors pension plan.

Key words: strategic asset allocation, pension plan, default risk, liability, discount rate