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Spinoff/Terminations and the Value of Pension Insurance

Alan J. Marcus
The Journal of Finance
Vol. 40, No. 3, Papers and Proceedings of the Forty-Third Annual Meeting American Finance Association, Dallas, Texas, December 28-30, 1984 (Jul., 1985), pp. 911-924
Published by: Wiley for the American Finance Association
DOI: 10.2307/2327818
Stable URL: http://www.jstor.org/stable/2327818
Page Count: 14
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Spinoff/Terminations and the Value of Pension Insurance
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Abstract

This paper derives the value of Pension Benefit Guarantee Corporation (PBGC) pension insurance under two scenarios of interest. The first allows for voluntary plan termination, which appears to be legal under current statutes. In the second scenario, termination is prohibited unless the firm is bankrupt. Empirical estimates of PBGC liabilities are calculated. These show that prospective PBGC liabilities greatly exceed current reserves for plan terminations, that even under a bankruptcy-only termination rule, PBGC liabilities still would be quite sensitive to discretionary funding policy, and that the increasingly common practice of pension spinoff/terminations, substantially increases the present value of the PBGC's contingent liabilities.

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