Abstract: In recent years, defined benefit (DB) plan sponsors have sought to reduce pension risk through strategies such as buyouts that involve the purchase of annuities from insurance companies. While pension buyouts can generally help employers reduce pension liabilities and related expenses and improve firm performance, little attention has been paid to the implications of pension risk transfer for employees. To fill this gap, we compare the total risks of employees with and without pension buyouts based on a model calibrated to market data in a stochastic framework. Our numerical examples show that the extent to which a buyout will affect the welfare of employees greatly depends on the financial soundness of their employer, plan funding status, PBGC maximum guarantees and state guarantee association protection limits. Our findings provide important insights for regulators and policymakers concerning best practices for pension de-risking through buyouts.
Yijia Lin is the N. Z. Snell Life Insurance Professor at the University of Nebraska - Lincoln. She earned BA degree in insurance and MA degree in finance and insurance both at Beijing Technology and Business University. Dr. Lin earned her Ph.D. in Risk Management and Insurance at Georgia State University. She is also a Chartered Financial Analyst (CFA®) Charterholder. Dr. Lin’s research interests are in risk management, insurance, longevity/mortality securitization and actuarial science. She has published papers in the Journal of Risk and Insurance, the North American Actuarial Journal, the Insurance: Mathematics and Economics, the Journal of Management, and others. She is also a Co-Editor of the Journal of Risk and Insurance and a Co-Editor of the North American Actuarial Journal.