An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans

Upjohn Institute Working Paper No. 12-179

46 Pages Posted: 27 Jan 2012  

Nancy Mohan

University of Dayton

Ting Zhang

University of Dayton - School of Business Administration

Date Written: November 18, 2011

Abstract

This paper investigates the determinants of public pension plan risk-taking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and beta. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing financial constraints allocate more assets to equity and have higher pension asset betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds. Finally, the results offer mild support of a public union effect.

Keywords: Public pension funds, investment risk, state financial constraints, risk transfer, government accounting

JEL Classification: G23, H75, G11

Suggested Citation

Mohan, Nancy and Zhang, Ting, An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans (November 18, 2011). Upjohn Institute Working Paper No. 12-179. Available at SSRN: https://ssrn.com/abstract=1992009

Nancy Mohan (Contact Author)

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States
513-229-2416 (Phone)
513-229-2477 (Fax)

Ting Zhang

University of Dayton - School of Business Administration ( email )

300 College Park
Dayton, OH 45469
United States

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