The Usefulness of the Wind‐Up Measure of Pension Liabilities: A Labor Market Perspective

  • Author(s): JAMES E. PESANDO
  • Published: Apr 30, 2012
  • Pages: 927-940
  • DOI: 10.1111/j.1540-6261.1985.tb05020.x

ABSTRACT

Financial economists have long favored the use of a wind‐up measure of the firm's pension liabilities. Yet the pension liabilities of the firm also represent the pension wealth of its workers. It is reasonable to presume that workers and shareholders have a common view of the pension contract. If the wind‐up measure depicts the true pension liabilities of the firm, then the wage concession granted by its workers must reflect the fact that the firm may choose to terminate the plan at any time. Data on the wage‐service characteristics of the membership of a sample of final earnings plans in Canada suggest, contrary to the implications of the wind‐up measure, that workers' wages do not internalize accruing pension benefits on a year‐to‐year basis. Instead, the data suggest that pension plans may be a vehicle through which a significant portion of the total compensation of individual employees is deferred until their later work years, and that the wind‐up measure may well understate the pension liabilities of an on‐going firm.

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