Pension funding policy and corporate finance

by Man-bing Sze

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This paper considers private pension plans, their role in corporate finance, their funding levels, and the role of government policy in regulating and backing them. In particular, it focuses on the Employee Retirement Income Security Act of 1974 (ERISA) within the government regulatory environment, and assesses the social objective of retirement income security and the future of ERISA. Using a new method to measure pension liabilities, the author shows that funding is seriously inadequate due to unrealistic and ineffective regulations that allow companies to use pension funding for other corporate purposes. As a result, ERISA cannot achieve its goal of fully funded pensions, and proposed changes may not be successful. The author suggests instead that the market system can provide an alternative mechanism to achieve ERISA's social objective of retirement income security.

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