Working Paper: CEPR ID: DP3955
Authors: Timothy Besley; Andrea Prat
Abstract: Recent events in several countries have underscored the importance of good governance in private occupational pension plans. The present Paper uses contract theory to analyse the interplay of residual claims and control rights in private pensions. The residual claimant is the plan sponsor in a defined benefit (DB) plan and the pool of beneficiaries in a defined contribution (DC) plan. The main control rights we examine relate to decisions on funding, asset allocation, and asset management. Under complete contracting, governance can be shown to be neutral: DC and DB plans differ only on risk allocation. If instead contracts are incomplete, a DB (DC) plan should: (1) Assign more vigilance responsibility to the sponsor (beneficiaries); (2) Rely less (more) on trustees; (3) Tend to employ trustees that are professional experts (caring insiders); (4) Assign asset allocation rights to the sponsor (beneficiaries); (5) have strict funding requirements.
Keywords: governance; pension fund; private pension
JEL Codes: G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Complete contracts (D86) | governance neutrality (H11) |
| DB plan (Y10) | more vigilance responsibility assigned to sponsor (G34) |
| DC plan (Y10) | more vigilance responsibility assigned to beneficiaries (H55) |
| Choice of plan (G11) | allocation of risk (G22) |
| Sponsor less risk-averse (G40) | DB plans preferred (Y10) |
| Incomplete contracts (D86) | governance structure influences performance (H11) |
| Lower vigilance cost (D61) | residual claimant enhances performance incentives (J33) |
| Multiple beneficiaries in DC plans (J32) | freeriding problem (H40) |
| freeriding problem (H40) | diminished vigilance (D91) |
| Diminished vigilance (D91) | DB plans more attractive for governance (G34) |
| Trustees' effectiveness (G34) | impacts performance of pension funds (G23) |
| Trustee profile (G34) | varies based on type of pension plan (J32) |