Pension Fund Asset Allocation and Liability Discount Rates
Erasmus University Rotterdam, Erasmus School of Economics
University of Notre Dame
September 30, 2016
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 U.S., 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.
Number of Pages in PDF File: 52
Keywords: pension funds, defined benefit, regulation, liability discount rates, asset allocation, risk-taking, funding status, governance, board members.
JEL Classification: G11, G18, G23, H55.
Date posted: May 29, 2012 ; Last revised: October 1, 2016