Does Surplus Sharing Increase Risk-Taking in a Corporate Defined Benefit Pension Plan?

This paper studies the surplus-sharing effects on the risk-taking of a corporate defined benefit (DB) pension plan. The focus is on the influence of the participants’ proportion of surplus and of the relative weight of equityholders to participants. We prove that participants’ risk-taking increases due to surplus sharing and when decreasing the participants’ proportion of surplus. Numerical results show that surplus sharing makes also equityholders less risk averse and that equityholders’ risk-taking in general increases when increasing the participants’ proportion of surplus. We prove that, in the portfolio considering both participants’ and equityholders’ interests, increasing the weight of equityholders to participants decreases risk-taking when the participants’ proportion of surplus or the funding level is low. The numerical analysis also shows that conflicts of interest between participants and equityholders are common and that in order to ensure that the plan’s risk-taking is never very high, the relative weight of equityholders to participants should be high.