Mario Jametti, Ph.D., Department of Economics, York University, 4700 Keele Street, Toronto, ON M3J 1P3, Canada
Although Defined Benefit (DB) pension plans allocate many of the financial risks involved with the plan from beneficiaries to the sponsoring firm, (future) retirees face a residual risk, that of an underfunded plan at the moment of firm bankruptcy. As a protective measure, several countries have introduced publicly owned insurance mechanisms, such as the Pension Benefit Guarantee Corporation in the US. Theoretical analysis of these mechanisms has shown that they are likely suffer from problems of excessive risk taking, moral hazard and adverse selection, but few empirical studies have addressed the extent of these problems. We explore the effect of benefit insurance on the behaviour of DB plan managers, particularly addressing the issue of excessively risky portfolio allocation. We use the unique institutional framework of Canada, where only one province, Ontario, has benefit insurance, while other provinces rely solely on plan regulation.