Pension Fund Asset Allocation and Liability Discount Rates Article Swipe

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Pension Incentive Global assets under management Liability Business Asset allocation Asset (computer security) Finance Rate of return Fund of funds Order (exchange) Actuarial science Institutional investor Economics Portfolio Computer security Microeconomics Corporate governance Market liquidity Computer science

Aleksandar Andonov , Rob Bauer , Martijn Cremers ·

YOU? · · 2017 · Open Access · · DOI: https://doi.org/10.1093/rfs/hhx020 · OA: W3121828250

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.