The Pension Research Council
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Working Paper

The Shareholder-Optimal Design of Cash Balance Pension Plans

Jeremy Gold

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Abstract — In 1980 and 1981, Fischer Black and Irwin Tepper showed that shareholders would gain if corporate defined benefit pension assets were invested in taxable fixed income securities instead of equities. This paper extends this analysis into the cash balance plan arena, concluding that additional shareholder gains arise when plan liabilities mimic equities. A numerical example demonstrates that the present value of riskless gains to shareholders can exceed the entire after-tax value of plan assets. Lack of transparency in actuarial methods and assumptions is shown to impede implementation.