Portfolio Allocation for Public Pension Funds / George Pennacchi, Mahdi Rastad.

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Pennacchi, George

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w16456.Publication details: Cambridge, Mass. National Bureau of Economic Research 2010.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper presents a dynamic 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 to 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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w16456 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w16453 Policy Options for State Pension Systems and Their Impact on Plan Liabilities /	nber w16454 Decoding Inside Information /	nber w16455 On the Timing and Pricing of Dividends /	nber w16456 Portfolio Allocation for Public Pension Funds /	nber w16457 Estimation and Evaluation of Conditional Asset Pricing Models /	nber w16458 How Does the U.S. Government Finance Fiscal Shocks? /	nber w16459 Globalization, Technology, and the Skill Premium: A Quantitative Analysis /	Next

October 2010.

This paper presents a dynamic 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 to 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.