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 language | English |
|---|---|
| Pages (from-to) | 2555-2595 |
| Number of pages | 41 |
| Journal | Review of Financial Studies |
| Volume | 30 |
| Issue number | 8 |
| DOIs | |
| Publication status | Published - 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