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Optimal Corporate Pension Policy: A Unified Framework

This paper develops a general continuous-time framework for defining optimal corporate pension policy. Interactions between the firm's optimal investment and financing policies and the defined benefit pension plan optimal portfolio strategy are studied. We prove that the three decision rules are driven by speculation and hedging motives, the latter concerning in each case both the pension plan and firm variables. We emphasize that in normal times the optimal pension portfolio rule from the equity holders' perspective is acceptable to both the participants and PBGC. Yet it is no longer the case when the firm approaches financial distress. The PBGC should then exert a much stronger control than today exerted on the sponsoring company to prevent the further deterioration of the Corporation's financial status.