Pension Fund Asset Allocation and Liability Discount Rates
Erasmus University Rotterdam, Erasmus School of Economics
University of Notre Dame
We compare asset allocations, liability discount rates, and performance across public and private pension funds in the U.S., Canada, and Europe. In the past two decades, U.S. public pension funds uniquely increased allocations to risky investments, especially as more members retired. We explain this increase by the incentives from their distinct regulation linking the liability discount rate to the expected return on assets rather than to the riskiness of their promised pension benefits. Their increased risk-taking allows them to maintain high discount rates, even as interest rates decline, underreport the underfunding and is associated with an annual underperformance of 60 basis points.
Number of Pages in PDF File: 54
Keywords: pension funds, public policy, defined benefit, risk-taking, asset-liability management, asset allocation, liability discount rates, retirement, mature, regulation
JEL Classification: G11, G18, G23, H55
Date posted: May 29, 2012 ; Last revised: May 20, 2014
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