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Financial Risks and the Pension Protection Fund: Can it Survive Them?

Author

Listed:
  • David Blake
  • John Cotter
  • Kevin Dowd
Abstract
This paper discusses the financial risks faced by the UK Pension Protection Fund (PPF) and what, if anything, it can do about them. It draws lessons from the regulatory regimes under which other financial institutions, such as banks and insurance companies, operate and asks why pension funds are treated differently. It also reviews the experience with other government-sponsored insurance schemes, such as the US Pension Benefit Guaranty Corporation, upon which the PPF is modelled. We conclude that the PPF will live under the permanent risk of insolvency as a consequence of the moral hazard, adverse selection, and, especially, systemic risks that it faces.

Suggested Citation

  • David Blake & John Cotter & Kevin Dowd, 2011. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," Papers 1103.5978, arXiv.org.
    • Handle: RePEc:arx:papers:1103.5978
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    References listed on IDEAS

    as
    1. Kevin Dowd & David Blake, 2006. "After VaR: The Theory, Estimation, and Insurance Applications of Quantile‐Based Risk Measures," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 193-229, June.
    2. Treynor, Jack L, 1977. "The Principles of Corporate Pension Finance," Journal of Finance, American Finance Association, vol. 32(2), pages 627-638, May.
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    4. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
    5. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1.
    6. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
    7. Paul H. Kupiec & James M. O'Brien, 1995. "The use of bank trading risk models for regulatory capital purposes," Finance and Economics Discussion Series 95-11, Board of Governors of the Federal Reserve System (U.S.).
    8. Alan Marcus, 1987. "Corporate Pension Policy and the Value of PBGC Insurance," NBER Chapters, in: Issues in Pension Economics, pages 49-80, National Bureau of Economic Research, Inc.
    9. Patricia Jackson & David Maude & William Perraudin, 1998. "Bank Capital and Value at Risk," Bank of England working papers 79, Bank of England.
    10. David McCarthy & Anthony Neuberger, 2005. "Pricing pension insurance: the proposed levy structure for the Pension Protection Fund," Fiscal Studies, Institute for Fiscal Studies, vol. 26(4), pages 471-489, December.
    11. Langetieg, T. C. & Findlay, M. C. & da Motta, L. F. J., 1982. "Multiperiod Pension Plans and ERISA," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(4), pages 603-631, November.
    12. Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 399-441.
    13. Jón Daníelson, 2003. "On the Feasibility of Risk Based Regulation," CESifo Economic Studies, CESifo Group, vol. 49(2), pages 157-179.
    14. David McCarthy & Anthony Neuberger, 2005. "The Pension Protection Fund," Fiscal Studies, Institute for Fiscal Studies, vol. 26(2), pages 139-167, June.
    15. Christopher M. Lewis & George Pennacchi, 1994. "The value of Pension Benefit Guaranty Corporation insurance," Proceedings, Federal Reserve Bank of Cleveland, pages 735-756.
    16. Bodie, Zvi & Shoven, John B. & Wise, David A. (ed.), 1987. "Issues in Pension Economics," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226062846, August.
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    Cited by:

    1. John Cotter & David Blake & Kevin Dowd, 2012. "What Should Be Done About The Underfunding of Defined Benefit Pension Schemes?," Working Papers 201202, Geary Institute, University College Dublin.
    2. Platanakis, Emmanouil & Sutcliffe, Charles, 2016. "Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 14-28.

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    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G0 - Financial Economics - - General

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