Determinants of Expected Returns at Public Defined-Benefit Pension Plans

47 Pages Posted: 23 May 2015

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland

John W. Goodell

University of Akron - Department of Finance, College of Business Administration

Date Written: May 22, 2015

Abstract

Estimated expected returns are important for pension plans, as they influence many plan characteristics including required asset levels, annual contributions, and the extent of plan under- or over funding. Yet, there seems to be little prior literature on the factors influencing these estimated future returns. In an attempt to fill this gap, this paper presents the results of a panel analysis of data on the determinants of such returns used by US public defined-benefit (DB) pension plans for the period 2001-2011. As expected, we find that real return estimates by DB public pension funds are positively related to fund size, fund age, international asset diversification, state income, and corruption levels. However, more interestingly and importantly, we document that real return estimates by public US DB pension funds are positively related to cultural measures of individualism and masculinity, and negatively related to uncertainty avoidance. These results should be of much interest not only to scholars and pension beneficiaries, but also to fund managers, other capital market participants, and policymakers.

Keywords: public pensions, defined benefit pensions, estimated returns, public policy, pension underfunding, finance and culture

JEL Classification: H3; H4; H6; I00; J3

Suggested Citation

Aggarwal, Raj and Goodell, John W., Determinants of Expected Returns at Public Defined-Benefit Pension Plans (May 22, 2015). FRB of Cleveland Working Paper No. 15-08. Available at SSRN: https://ssrn.com/abstract=2609449 or http://dx.doi.org/10.2139/ssrn.2609449

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

John W. Goodell

University of Akron - Department of Finance, College of Business Administration ( email )

259 S. Broadway
Akron, OH 44325
United States

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