A Comparative Analysis Of Global Pension Tax Arbitrage

Abstract

In a company with defined benefit plans, pension assets often represent a sizable portfolio of financial assets.  The intention is to examine whether pension tax arbitrage has the potential to add value to the sponsoring corporation with secondary benefits to plan participants, through a less volatile pension fund. To implement the arbitrage, it is recommended that the plans shift all assets to bonds.  Replacing stocks with bonds reduces the risk of the firm, and the benefit stems from the creation of an additional tax deduction on the payment of interest with no increase in firm risk.