DISCUSSION.

This paper attempts to value the insurance provided by the Pension Benefit Guarantee Corporation (PBGC) under Title IV of ERISA (1974). The author's approach is to use an option pricing framework to develop two put option valuation models. After an introductory overview of the issues and problem, the author presents two put models in Section I of the paper: (1) One model under the assumption of voluntary termination by the firm and (2) a second model assuming bankruptcy (involuntary termination) on the part of the firm. Section II of the paper contains some empirical estimates for the value of PBGC insurance using the models from part one plus some actual pension data from a survey reported in Pensions and Investment Age (July 11, 1983). The author concludes that the actual value of PBGC insurance to a company is fairly represented by the value of the put option and is bounded by the two put option values developed under the voluntary and bankruptcy scenarios of Section I. He also concludes that simply taking the difference between the actuarially determined value of the accrued benefits (A) and the value of assets in the pension fund plus 30 percent of equity (F + 0.3E) is a very low estimate of the real value of PBGC insurance to major U.S. corporations. [ABSTRACT FROM AUTHOR]