Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance: An Overview of Theory and Evidence

I review the theoretical literature on defined-benefit pension plans, particularly focusing on the issue of plan underfunding and benefit guarantee insurance schemes. Under reasonable assumptions underfunding can be an equilibrium outcome even in the absence of benefit insurance. The introduction of benefit guarantee funds was a reaction to the problem of underfunding, and I summarize the ensuing problems of moral hazard and adverse selection. I then discuss the still rather small body of empirical research on the subject and propose directions for future research.