Pension Fund Asset Allocation and Liability Discount Rates

Aleksandar Andonov, Rob Bauer, Martijn Cremers*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

The unique regulation of U.S. public pension funds links their liability discount rate to the expected return on assets, which gives them incentives to invest more in risky assets in order to report a better funding status. Comparing public and private pension funds in the United States, Canada, and Europe, we find that U.S. public pension funds act on their regulatory incentives. U.S. public pension funds with a higher level of underfunding per participant, as well as funds with more politicians and elected plan participants serving on the board, take more risk and use higher discount rates. The increased risk-taking by U.S. public funds is negatively related to their performance.
Original languageEnglish
Pages (from-to)2555-2595
Number of pages41
JournalReview of Financial Studies
Volume30
Issue number8
DOIs
Publication statusPublished - Aug 2017

JEL classifications

  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"
  • g11 - "Portfolio Choice; Investment Decisions"
  • g18 - General Financial Markets: Government Policy and Regulation

Keywords

  • pension funds, defined benefit, regulation, liability discount rates, asset allocation, risk-taking, funding status, governance, board members
  • LIFE-CYCLE
  • PLANS
  • COST
  • FINANCING CONSTRAINTS
  • PERFORMANCE
  • INVESTMENT
  • PORTFOLIO CHOICE
  • RISK
  • STATE
  • CORPORATE GOVERNANCE

Cite this