Forthcoming in The Review of Financial Studies: “Pension Fund Asset Allocation and Liability Discount Rates”

The Review of Financial Studies

17-11-16 |

Paper by:
Aleksandar Andonov, Erasmus University Rotterdam
Rob Bauer, Maastricht University
Martijn Cremers, University of Notre Dame

Abstract:
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 nd that U.S. public pension funds act on their regulatory incentives. U.S. public pension funds with a higher level of nderfunding 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.

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