Abstract

http://ssrn.com/abstract=2070054
 
 

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Pension Fund Asset Allocation and Liability Discount Rates


Aleksandar Andonov


Erasmus University Rotterdam, Erasmus School of Economics

Rob Bauer


Maastricht University

Martijn Cremers


University of Notre Dame

May 2014


Abstract:     
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

working papers series


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Date posted: May 29, 2012 ; Last revised: May 20, 2014

Suggested Citation

Andonov, Aleksandar and Bauer, Rob and Cremers, Martijn, Pension Fund Asset Allocation and Liability Discount Rates (May 2014). Available at SSRN: http://ssrn.com/abstract=2070054 or http://dx.doi.org/10.2139/ssrn.2070054

Contact Information

Aleksandar Andonov
Erasmus University Rotterdam, Erasmus School of Economics ( email )
Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands
Rob Bauer
Maastricht University ( email )
P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)
K. J. Martijn Cremers (Contact Author)
University of Notre Dame ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
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