Pension Fund Asset Allocation and Liability Discount Rates: Camouflage and Reckless Risk Taking by U.S. Public Plans?

38 Pages Posted: 12 Feb 2013

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: May 1, 2012

Abstract

We use an international pension fund database to compare the asset allocation and liability discount rates of public and non-public funds in the U.S., Canada and Europe. We document that U.S. public funds exploit the opaque incentives provided by their distinct regulatory environment and behave very differently from U.S. corporate funds and both public and non-public pension funds in Canada and Europe. In the past two decades, U.S. public funds uniquely increased their allocation to riskier investment strategies in order to maintain high discount rates and present lower liabilities, especially if their proportion of retired members increased more. In line with economic theory, all other groups of pension funds reduced their allocation to risky assets as they mature, and lowered discount rates as riskless interest rates declined. The arguably camouflaging and risky behavior of U.S. public pension plans seems driven by the conflict of interest between current and future stakeholders, and could result in significant costs to future workers and taxpayers.

Keywords: pension funds, public, asset liability management, asset allocation, liability discount rates, retired, mature, regulation

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: Camouflage and Reckless Risk Taking by U.S. Public Plans? (May 1, 2012). Netspar Discussion Paper No. 05/2012-061, Available at SSRN: https://ssrn.com/abstract=2214890 or http://dx.doi.org/10.2139/ssrn.2214890

Aleksandar Andonov

University of Amsterdam and CEPR ( email )

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HOME PAGE: http://www.aleksandarandonov.com

Rob Bauer (Contact Author)

Maastricht University ( email )

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

European Centre for Corporate Engagement (ECCE) ( email )

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K. J. Martijn Cremers

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
Belgium

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