Prudent Investors: The Asset Allocation of Public Pension Plans

28 Pages Posted: 10 Nov 2008

See all articles by Christian E. Weller

Christian E. Weller

University of Massachusetts Boston - Department of Public Policy and Public Affairs; University of Massachusetts Boston - Gerontology Institute; Political Economy Research Institute

Jeffrey B. Wenger

RAND Corporation; American University - School of Public Affairs

Date Written: July 21, 2008

Abstract

After 2000, the vast majority of defined benefit (DB) pension plans encountered a decrease in their funding ratios, largely due to a drop in asset prices. It is possible that public sector pension plans may have acted imprudently by chasing returns, once they encountered underfunding. We identify four indicators for DB plans' imprudent investment behavior: no portfolio rebalancing, employer conflicts of interest, trustee conflicts of interest, and failure to implement best investment practices.

To see if public sector pension plans rebalance their portfolios, we use data from the Federal Reserve's Flow of Funds, dating from 1952 to 2007. To test for the remaining three hypotheses, we use data from the Census' State and Local Government Employee Retirement Systems data base, where consistent data for state and local government plans are available from 1993 to 2005. Our results suggest that there is no evidence that public sector plans systematically engaged in imprudent investment behavior and that this did not systematically differ after 2000 from the earlier period.

Keywords: defined benefit pensions, portfolio allocation, investment policy, moral hazard

JEL Classification: G11, G23, J26

Suggested Citation

Weller, Christian E. and Wenger, Jeffrey B., Prudent Investors: The Asset Allocation of Public Pension Plans (July 21, 2008). Available at SSRN: https://ssrn.com/abstract=1298654 or http://dx.doi.org/10.2139/ssrn.1298654

Christian E. Weller (Contact Author)

University of Massachusetts Boston - Department of Public Policy and Public Affairs ( email )

McCormack Graduate School
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HOME PAGE: http://blog.umb.edu/christianweller

University of Massachusetts Boston - Gerontology Institute ( email )

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Political Economy Research Institute ( email )

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Jeffrey B. Wenger

RAND Corporation ( email )

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310 393 0411 (Phone)

American University - School of Public Affairs ( email )

Washington, DC 20016
United States

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