Pension Fund Asset Allocation and Liability Discount Rates

53 Pages Posted: 29 May 2012 Last revised: 22 Feb 2017

See all articles by Aleksandar Andonov

Aleksandar Andonov

University of Amsterdam and CEPR

Rob Bauer

Maastricht University; European Centre for Corporate Engagement (ECCE)

Martijn Cremers

University of Notre Dame; ECGI

Date Written: February 21, 2017


The unique regulation of U.S. public pension funds links their liability discount rate to the expected return on assets, which gives them incentives to invest more in risky assets in order to report a better funding status. Comparing public and private pension funds in the United States, Canada, and Europe, we find that U.S. public pension funds act on their regulatory incentives. U.S. public pension funds with a higher level of underfunding per participant, as well as funds with more politicians and elected plan participants serving on the board, take more risk and use higher discount rates. The increased risk-taking by U.S. public funds is negatively related to their performance.

Keywords: pension funds, defined benefit, regulation, liability discount rates, asset allocation, risk-taking, funding status, governance, board members

JEL Classification: G11, G18, G23, H55

Suggested Citation

Andonov, Aleksandar and Bauer, Rob and Cremers, K. J. Martijn, Pension Fund Asset Allocation and Liability Discount Rates (February 21, 2017). Available at SSRN: or

Aleksandar Andonov

University of Amsterdam and CEPR ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV


Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
+31 43 3883871 (Phone)

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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