Does surplus/deficit sharing increase risk-taking in a corporate defined benefit pension plan?

This paper studies the surplus-/deficit-sharing effects on the risk-taking of a corporate defined benefit pension plan. Our analytical results show that when a surplus-/deficit-sharing rule is introduced, the participants’ risk-taking increases, while the direction of the surplus-/deficit-sharing effect on the equityholders’ risk-taking is ambiguous. The numerical analysis reveals that for plausible parameter values, the equityholders’ risk-taking increases due to the introduction of surplus/deficit sharing. The participants’ risk-taking increases much more substantially than the equityholders’ risk-taking when introducing surplus/deficit sharing. The participants’ risk-taking is more sensitive to the level of funding than the equityholders’ risk-taking: The participants’ risk-taking can become extremely high for low funding levels. This high sensitivity of the participants’ risk-taking to low funding levels is reduced by introducing deficit sharing. Risk-taking is independent of the funding level when the surplus and deficit proportions are equal.