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Title:An analysis of risk-taking behavior for public defined benefit pension plans PDF Logo
Authors:Mohan, Nancy
Zhang, Ting
Issue Date:2012
Series/Report no.:Upjohn Institute Working Paper 12-179
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.
Subjects:public pension funds
investment risk
state financial constraints
risk transfer
government accounting
JEL:G23
H75
G11
Document Type:Working Paper
Appears in Collections:Upjohn Institute Working Papers, W. E. Upjohn Institute for Employment Research

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