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The Valuation of PBGC Insurance Premiums Using an Option Pricing Model

Published online by Cambridge University Press:  06 April 2009

Su-Jane Hsieh ,
Andrew H. Chen  and
Kenneth R. Ferris
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Abstract

This study applies an option pricing model to empirically derive pension put values for a sample of 176 individual pension plan sponsors insured by the Pension Benefit Guaranty Corporation (PBGC). This study finds that the pension put values for a group of 22 underfunded sponsors were significantly greater than the insurance premiums paid to the PBGC. On the other hand, for a group of 154 overfunded sponsors, the put values were also greater than the pension premiums paid to the PBGC, although the difference was not statistically significant. These findings suggest that underfunded plan sponsors are significantly undercharged by the PBGC, while overfunded plan sponsors are approximately fairly charged.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 1 , March 1994 , pp. 89 - 99
Copyright
Copyright © School of Business Administration, University of Washington 1994

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