Abstract and Keywords
Regardless of whether pensions are defined benefit or defined contribution, pension assets are an important segment of financial markets. But the implications for corporate finance are dramatically different if the pension-benefit structure is defined benefit or defined contribution. If a pensions are defined contribution, the employer provides no explicit or implicit guarantee and therefore its pension arrangements do not contribute to its debt. Even in systems with insured defined-contribution arrangements such as are predominant in Denmark, the direct guarantee obligation lies with insurance companies and not with employers. Low levels of funding, however, may require increased employer contributions, thereby creating, to an extent, an implicit liability. Where pensions are defined benefit, the pension liability is a direct part of the capital structure of the sponsoring employer. This article provides a broad overview of the corporate finance of pensions, starting with the theoretical contributions of Sharpe and others. After reviewing the theory, it summarizes the empirical evidence and then discusses unresolved issues in the literature.
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