Pension Fund Asset Allocation and Liability Discount Rates
Erasmus University Rotterdam, Erasmus School of Economics
University of Notre Dame
June 18, 2015
This paper studies the regulatory incentives of U.S. public pension funds to increase risk-taking arising from their unique regulation linking their liability discount rates to the expected return on assets, which enables them to report a better funding position by investing more in risky assets. Comparing public and private pension funds in the U.S., Canada, and Europe, U.S. public funds seem susceptible to these incentives. More mature U.S. public funds as well as funds with more political and participant-elected board members take more risk and use higher discount rates. The increased risk-taking of U.S. public plans is negatively related to their performance.
Number of Pages in PDF File: 45
Keywords: pension funds, defined benefit, public policy, regulation, liability discount rates, asset allocation, risk-taking, asset-liability management
JEL Classification: G11, G18, G23, H55
Date posted: May 29, 2012 ; Last revised: June 19, 2015
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