| Abstract: | The portability feature of a defined contribution (DC) pension greatly reduces the risk to the accumulation of pension wealth. Conversely, defined benefit (DB) pensions have a variety of default risks that decrease the expected value of DB pension wealth. This paper examines those risks. Accrual of DB pension wealth is characterized in terms of purchases of risky bonds. Changing jobs triggers default on these bonds. Simulations are presented to show the potential loss in pension wealth from default. In addition, a methodology used to price corporate bonds is applied to generate estimates of the implied risk premiums of DB pension bonds over comparable riskless bonds. |
