1. The stakeholders in the defined-benefit pension plans include: (1) Plan sponsor, often is employer, who is responsible for making fixed monthly payments to plan participants from retirement until death. (2) Plan participants, often are current or former employees, who are eligible for benefits.
(3) Pension fund or trust, an entity that is separate from the employer and which hold and invest funds to pay benefits to participants.2. Private companies and non-governmental institutions should offer DB pension plans, because they should have employer-sponsored pensions to provide incomes to retired workers. Employer-sponsored pensions also play important roles in supplementing government pensions, which are offered by government-owed companies and governmental institutions.3. Firms should appoint fiduciaries to control and manage pension plan operations, administration and assets. A desirable portfolio allocation should diversify plan assets to minimize risk of large losses from any one investment, considering asset risk/return ratios, and the portfolio’s liquidity relative to cash flow needs of the plan and to maximize its return. But it is clearly required that no more than 10% of a pension fund’s assets could be invested in the stock and other marketable securities of the sponsor company.
Actually, it depends on the firm’s financial health. For example, if the firm is in bad financial health, fund manager would adopt passive investment to have a well-diversified portfolio. But if it is in good financial health, fund manager might adopt active investment to exploit profitable conditions.4. In the pension plan portfolio, Bethlehem Steel allocated 26.
1% its fund to fixed income securities, and 73.9% its fund to corporate equities. As we all known, the average risk of corporate equities is usually higher than that of fixed income securities, as well as the average of return. At the end of 2000, the unfair trade practices and relatively high levels of steel importsin the country made Bethlehem Steel experience tough time. So its pension and retiree health plans was such a financial burden to them that they would like to take the risk to relieve its financial stress by allocate the majority of its fund to corporate equities. Thus, in terms of Bethlehem Steel lower-level workers, this allocation did harm their benefit in both short-term and long-term. As for Bethlehem Steel shareholders, the company was facing the possibility of filing bankruptcy in the future, this kind of allocation would actually make it possible to relieve its financial burden, so this allocation was sound for them.
However, as for the U.S. government, they should take the protection of Bethlehem Steel employees’ benefit in the pension plan into account, also they wanted to see the survival of this big company. So U.S.
government would be neutral to this allocation.5. Yes, we should. PBGC insurance would further protect DB plan participants when the sponsor execute termination of an overfunded or underfunded insured plan by becoming the trustee of the plan to pay the participants’ benefits when they retired. Yes, because PBGC did not use federal tax dollars for operations, they would charge sponsors specific amount per participant insurance premium. It would be better that the insurance is provided by the federal government.
Firstly, it should be Non-Profit Organization. Secondly, it is government’s duty to protect participants’ benefit. Thirdly, the government would have the financial back-up to operate this organization if there was some kind of sudden situation.6. Since in order to settle the liabilities, companies often bought long-term annuities that provided cash flows equal to future pension payments from highly-rate insurance companies.
The rate of annuities were similar to long-term, AA-rated corporate bond rates. So according to Exhibit 8, it should be the annually rate of Moody’s AA Corp, 7.48%, Long-term bonds rate.