Recent research has suggested that companies with defined benefit (DB) pensions are sometimes significantly misvalued by the market. This is because the measures of pension cost and pension net liabilities embedded in financial statements can provide a very misleading picture of pension finances, if taken at face value. The more pertinent information on pension finances is relegated to footnotes, which may not receive much attention from portfolio managers. Dramatic swings in the financial conditions of large DB plans around the turn of the decade focused attention on pension accounting practices, and growing dissatisfaction with current accounting standards has prompted the Financial Accounting Standards Board (FASB) to launch a project revamping DB pension accounting. Arguably, the increased attention should have made investors wise to the informational problems, thereby eliminating systematic mispricing in recent years. We test this proposition and conclude that investors continued to misvalue DB pensions, inducing sizable valuation errors in the stock of many companies. Our findings suggest that FASB's current reform efforts could substantially aid the market's ability to value firms with DB pensions.

Demographic change causes an undersupply of financial old age benefits within the statutory pay-as-you-go pension system in Germany. Therefore, the provision of occupational as well as private pensions has to be enhanced. However, there seems to be an undersupply of occupational pension provision particularly in small and medium sized enterprises (SMEs). Using survey data of the German Socio-Economic Panel (GSOEP) and the German SAVE survey, the present paper studies econometrically the determinants of occupational pension provision in Germany. It shows that occupational pensions depend not only on supply-side factors such as firm size and industry, but also on demand-side factors such as individual sociodemo-graphic attributes and people's savings motives.

This paper discusses the valuation of wage-indexed pension liabilities. Valuation of these contingent claims by replication is typically not possible as the wage index cannot be hedged perfectly with financial market instruments. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor.

The purposes of this paper are to consider the effect on remuneration of defined benefit pension accrual and the factors that have resulted in changes to the cost and value of this accrual. In this paper, I look at the effect of the change in the cost to an employer of providing a defined benefit pension on the overall cost of remunerating an employee and compare that with the cost of remunerating an employee with no such pension benefits. I allow for the additional cost to the employer of national insurance contributions (‘NICs’). I also look at the change in value of an employee's remuneration, taking into account the value of defined benefit pension accrual and compare this with the change in remuneration for an employee with no such benefits. Here, I allow for employee national insurance contributions and income tax. These assessments look at the cost and value of pension accrual rather than any surplus or deficit relating to previously accrued pension entitlements. I find that costs of employment have risen significantly more for members of defined benefit pension schemes compared with other employees, and that this has largely been as a result of falling long-term interest rates and their effect on the cost of defined benefit pension accrual. The increase in the value of remuneration to employees has shown a similar pattern.

In response to population aging, pay-as-you-go pensions are being reduced in almost all developed countries. In many countries, governments aim to fill the resulting gap with subsidized private pensions. This paper exploits the recent German pension reform to shed new light on the uptake of voluntary, but heavily subsidized private pension schemes. Specifically, we investigate how the uptake of the recently introduced ‘Riester pensions’ depends on state-provided saving incentives, and how well the targeting at families and low-income households works in practice.

We show that, after a slow start, private pension plans took off very quickly. While saving incentives were effective in reaching parents, they were less successful in attracting low-income earners, although Riester pensions exhibit a more equal pattern by income than occupational pensions and unsubsidized private pension plans.

We also provide circumstantial evidence on displacement effects between saving for old-age provision and other purposes. Households who plan to purchase housing are less likely to have a Riester pension. The same holds for households who attach high importance to a bequest motive. Occupational pensions and other forms of private pensions, however, act as complements rather than as substitutes.

Rising elderly life expectancies imply the need to accumulate sufficient savings for retirement. This paper investigates the role of recent changes in the investment menu of the Singaporean Central Provident Fund (CPF) system. Our research explores the investment patterns of CPF participants and articulates their implications for policymakers. We find that most investors use their money for housing purchase and default the remainder to the CPF investment pool. The bulk of non-housing saving sits in bank accounts paying a low return. A fraction of workers does elect outside investment products, with high-income earners and males taking more risk than low-income earners and females. Since workers who default their money to the CPF fund receive a guaranteed 2.5% return on the Ordinary Account and 4% on the Special Account, hurdle rates for money market and equity funds are substantial. These high hurdle rates help explain why few CPF account holders invest outside the default government investment pool, though inertia probably explains why many employees let their funds sit in bank accounts earning low interest rates. More attention could be devoted to lowering fund expenses and commissions, including the myriad of fees, expenses, loads, and wrap charges; it might also be beneficial to streamline and rationalize the investment menu offered to participants.

Economic and demographic pressures may lead Social Security systems and employers to reduce their pensions in the future. Can delaying retirement help preserve welfare in that context? We examine this question with a life-cycle framework which includes the utility from leisure. One unique feature of our model is that it lets the retirement date be endogenously determined, unless an external constraint or shock applies first. By solving this model we find that, in reasonable scenarios, working longer does little to mitigate the negative impact of pension reductions on welfare. Building on our model, we suggest strategies to enhance the effectiveness of policies designed to induce and enable longer working lives.

This study examines the consequences of a pension fund investing in the stock of the sponsoring firm. Using a merger of data on pension asset holdings from IRS Form 5500 filings and financial data on the company's stock from CRSP, two broad questions are addressed: first, what factors influence the extent of a pension fund's investments in the employer's stock? Second, when a pension invests in the employer's stock, how much is lost as a result of poor diversification? The empirical results suggest that investments in employer stock are responsive to non-diversification costs, tax consequences, and the employee's ability to absorb risk. There is also evidence that employers and employees weight these factors differentially in their decision of how much employer stock to include in the pension. Using actual return data on pension plans, we also find that concentrated investments in employer stock substantially reduce risk-adjusted return performance. However, modest holdings of employer stock have negligible effects on pension performance.

The objective of the paper is to identify the determinants of the market share of each AFJP and the matrix of direct and cross price elasticities, by using a discrete choice model of product differentiation, based on the random utility theory. The results obtained from the estimation of a simple logit model using a panel of quarterly data between December of 1995 and June of 2006 shows the existence of two competitive mechanisms used by firms: prices and a vector of variables explaining horizontal differentiation, such as quantity of branches and salesman. The estimation of the nested-logit model supports the hypothesis of sequential election, where firms are chosen by their price setting strategies, defining two groups of competitors. Finally, the regulatory change that eliminates fixed commissions provides additional importance to prices signals in consumers' utility.

Large publicly held pools of assets are playing an increasingly prominent role in the global investment arena. We compare three distinct forms of such public funds, namely foreign exchange reserve funds, sovereign wealth funds, and public pension funds, to highlight their differences and similarities. We review previous studies on ways to better secure prudent and economically sound public fund management practices in these funds, as well as how to evaluate their governance and investment policies and how to better protect the assets from political interference. Drawing from the pension and corporate finance literature, we also link their management to governance practices and country-specific characteristics, and contrast those with empirical findings on linkages with corporate governance.

Empirical analyses of annuities markets have been limited to a few developed countries and restricted by data limitations. Chile provides excellent conditions for research on annuities due to the depth of its market and the availability of data. The paper utilizes a panel of life insurance company data to examine econometrically the main determinants of the annuity rate, defined as the internal rate of return on annuities. The results indicate that the annuity rate is determined by the risk-free interest rate, the share of privately issued higher yield securities in the portfolio of providers, as a proxy for the spread over the risk-free rate, the leverage of providers, the level of broker's commissions, the market share of individual providers, the level of the premium, and the degree of market competition. The results also show that efforts to improve market transparency produced structural shifts in the parameters of the annuity rate equation. The results are consistent with separate research on money's worth ratios, and indicate the need to develop appropriate financial instruments, allowing providers to hedge their risks while extracting higher returns, and also to ensure competition and transparency in annuities markets, in order to ensure good outcomes for annuitants.

This paper empirically examines the role of expected rate of return on pension assets reported under SFAS 87 as a tool for meeting and beating earnings targets and its effect on firm value. Results suggest that managers may use this pension assumption to inflate earnings per share (eps) when they are going to miss the earnings expectations. The earnings inflation is directly related to the amount by which earnings will miss the target and to earning sensitivity to expected return on pension asset assumption. The results are robust to two different measures of earnings inflation and two of earnings expectations.

The market behaves semi-efficiently and appears to adjust the firm value for large earnings inflations and in situations where firms have incentives to manipulate earnings or earnings are highly sensitive to expected rate of return on pension assets. However, this adjustment is not complete and post-announcement returns continue to depend on the inflated component of earnings, confirming that resource allocation decisions are based on managed earnings. Additional disclosure requirements to make pension assumptions more transparent are also discussed in the paper. Such disclosures could enhance the efficient use of the information by market participants.

Debate over superiority of pension funding over pay-as-you-go links notably to the question whether funding improves economic performance sufficiently to generate additional resources to meet the needs of an ageing population. To address this issue, we design a modified Cobb–Douglas production function with pension assets as a shift factor, and investigate the direct link between pension assets and economic growth employing a dataset covering up to 38 countries, using a variety of appropriate econometric methods. We find positive results for both OECD countries and Emerging Market Economies (EMEs), with consistent evidence for a larger effect for EMEs than OECD countries.