Portfolio allocation for public pension funds

George Pennacchi, Mahdi Rastad

Research output: Contribution to journalArticlepeer-review

Abstract

This paper presents a model of a public pension fund's choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000-2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset-liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

Original languageEnglish (US)
Pages (from-to)221-245
Number of pages25
JournalJournal of Pension Economics and Finance
Volume10
Issue number2
DOIs
StatePublished - Apr 2011

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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