An analysis of risk-taking behavior for public defined benefit pension plans

Abstract

This paper investigates the determinants of public pension plan risk-taking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and beta. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing financial constraints allocate more assets to equity and have higher pension asset betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds. Finally, the results offer mild support of a public union effect.

Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives

“…The observed correlation between asset allocation and lagged investment returns implies that changes in the allocation of assets are prompted by an incentive for efficient risk management. On the contrary, Mohan and Zhang (2014) suggest that public funds undertake more risk when underfunded, which is consistent with the risk transfer hypothesis.…”

“…By contrast, Mohan and Zhang (2014) find that risk-shifting incentives dominate the US public pension funds asset allocation decisions. Some studies such as Campbell and Viceira (2001) and Cochrane (2014) show that investments in stocks can be less risky and more profitable for long horizon portfolios while other studies advocate a more conservative approach (e.g., Bader and Gold, 2007).…”

“…Following Jin et al (2006) and Mohan and Zhang (2014), we measure the pension asset beta as the weighted average of individual asset betas, i.e., r/Ux%yU nxx/z t/z@ =…”

“…More precisely, our study goes one step further from the recent works of Rauh (2009), Lucas and Zeldes (2009) and Mohan and Zhang (2014), since it explicitly accounts for exogenous factors that affect pension fund risk-taking behavior. We also extend these works by using a large sample and by offering new evidence on the discrimination between risk-shifting and risk management incentives in US public pension funds.…”

The risk–return profile of Lithuanian private pension funds

“…A good example is the Global Pension Statistics' project (OECD, 2013) launched in 2002 in order to create a valuable means to measure and monitor the retirement systems, as well as to compare those indicators, referring to wealth and investments, benefits and contributions, and operating expenses of private pension funds, across OECD and non-OECD countries. The statistical methods mainly applied to the analysis of empirical data generated by pension funds (Knill, Lee, & Mauck, 2012;Mohan & Zhang, 2014;Preciado & Recio, 2010). The risk estimation is on topic within this field of interest.…”