IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v23y2022i5d10.1057_s41260-022-00277-x.html
   My bibliography  Save this article

The asset allocation of defined benefit pension plans: the role of sponsor contributions

Author

Listed:
  • Artem Dyachenko

    (University of Trier)

  • Patrick Ley

    (University of Trier)

  • Marc Oliver Rieger

    (University of Trier)

  • Alexander F. Wagner

    (University of Zürich)

Abstract

What percentage of its assets should a defined benefit pension plan invest into stocks as its funding ratio varies? We show that the answer to this question depends on the institutional setting and in particular on the extent to which the sponsoring company contributes to the fund as the funding ratio varies. We consider two settings: in one setting, the sponsoring company contributes to its pension fund only if the funding ratio is below the target level (as is the case, for example, in the US); in the other setting, the sponsoring company always contributes to its pension fund (as is the case, for example, in Switzerland). We show that these two institutional frameworks lead to two different dynamics, conditional distributions of the funding ratios, and relationships between the current funding ratio and investment into stocks. For settings like the US, that relation is non-monotonic while for settings like in Switzerland, it is monotonically decreasing. Previous empirical findings point towards a similar pattern.

Suggested Citation

  • Artem Dyachenko & Patrick Ley & Marc Oliver Rieger & Alexander F. Wagner, 2022. "The asset allocation of defined benefit pension plans: the role of sponsor contributions," Journal of Asset Management, Palgrave Macmillan, vol. 23(5), pages 376-389, September.
    • Handle: RePEc:pal:assmgt:v:23:y:2022:i:5:d:10.1057_s41260-022-00277-x
    DOI: 10.1057/s41260-022-00277-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41260-022-00277-x
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41260-022-00277-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Magnus Dahlquist & Ofer Setty & Roine Vestman, 2018. "On the Asset Allocation of a Default Pension Fund," Journal of Finance, American Finance Association, vol. 73(4), pages 1893-1936, August.
    2. Thomas Crossley & Mario Jametti, 2013. "Pension Benefit Insurance and Pension Plan Portfolio Choice," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 337-341, March.
    3. Broeders, Dirk & Chen, An, 2010. "Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1201-1214, June.
    4. Aleksandar Andonov & Rob M.M.J. Bauer & K.J. Martijn Cremers, 2017. "Pension Fund Asset Allocation and Liability Discount Rates," The Review of Financial Studies, Society for Financial Studies, vol. 30(8), pages 2555-2595.
    5. Hainaut, Donatien & Deelstra, Griselda, 2011. "Optimal funding of defined benefit pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(1), pages 31-52, January.
    6. Julia Lynn Coronado & Steven A. Sharpe, 2003. "Did Pension Plan Accounting Contribute to a Stock Market Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 323-371.
    7. Ling-Ni Boon & Marie Brière & Sandra Rigot, 2018. "Regulation and Pension Fund Risk-Taking," Post-Print hal-02315479, HAL.
    8. Josa-Fombellida, Ricardo & López-Casado, Paula & Rincón-Zapatero, Juan Pablo, 2018. "Portfolio optimization in a defined benefit pension plan where the risky assets are processes with constant elasticity of variance," Insurance: Mathematics and Economics, Elsevier, vol. 82(C), pages 73-86.
    9. Detemple, Jérôme & Rindisbacher, Marcel, 2008. "Dynamic asset liability management with tolerance for limited shortfalls," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 281-294, December.
    10. Sundaresan, Suresh & Zapatero, Fernando, 1997. "Valuation, Optimal Asset Allocation and Retirement Incentives of Pension Plans," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 631-660.
    11. Boon, L.N. & Brière, M. & Rigot, S., 2018. "Regulation and pension fund risk-taking," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 23-41.
    12. Rubinstein, Mark, 1976. "The Strong Case for the Generalized Logarithmic Utility Model as the Premier Model of Financial Markets," Journal of Finance, American Finance Association, vol. 31(2), pages 551-571, May.
    13. Siegmann, Arjen, 2007. "Optimal investment policies for defined benefit pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(1), pages 1-20, March.
    14. An, Heng & Huang, Zhaodan & Zhang, Ting, 2013. "What determines corporate pension fund risk-taking strategy?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 597-613.
    15. Ammann, Manuel & Zingg, Andreas, 2010. "Performance and governance of Swiss pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(1), pages 95-128, January.
    16. Mohan, Nancy & Zhang, Ting, 2014. "An analysis of risk-taking behavior for public defined benefit pension plans," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 403-419.
    17. Munnell, Alicia H. & Soto, Mauricio, 2004. "The outlook for pension contributions and profits in the US," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(1), pages 77-97, March.
    18. Love, David A. & Smith, Paul A. & Wilcox, David W., 2011. "The effect of regulation on optimal corporate pension risk," Journal of Financial Economics, Elsevier, vol. 101(1), pages 18-35, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michail Anthropelos & Evmorfia Blontzou, 2023. "On Valuation and Investments of Pension Plans in Discrete Incomplete Markets," Risks, MDPI, vol. 11(6), pages 1-24, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Boon, L.N. & Brière, M. & Rigot, S., 2018. "Regulation and pension fund risk-taking," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 23-41.
    2. Almaghrabi, Khadija S., 2023. "Non‐operating risk and cash holdings: Evidence from pension risk," Journal of Banking & Finance, Elsevier, vol. 152(C).
    3. Guohui Guan & Zongxia Liang & Yi Xia, 2023. "Optimal management of DB pension fund under both underfunded and overfunded cases," Papers 2302.08731, arXiv.org.
    4. Romaniuk, Katarzyna, 2019. "Premiums of the Pension Benefit Guarantee Corporation and risk-taking by pension plans," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 301-307.
    5. Jansen, Kristy, 2021. "Essays on institutional investors, portfolio choice, and asset prices," Other publications TiSEM fd998408-d282-4e0f-b542-4, Tilburg University, School of Economics and Management.
    6. Romaniuk, Katarzyna, 2021. "Pension insurance schemes and moral hazard: The Pension Benefit Guaranty Corporation should restrict the insured pension plans’ portfolio policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 37-43.
    7. Broeders, Dirk W. G. A. & Jansen, Kristy A. E. & Werker, Bas J. M., 2021. "Pension fund's illiquid assets allocation under liquidity and capital requirements," Journal of Pension Economics and Finance, Cambridge University Press, vol. 20(1), pages 102-124, January.
    8. Dirk Broeders & Kristy Jansen & Bas Werker, 2017. "Pension fund's illiquid assets allocation under liquidity and capital constraints," DNB Working Papers 555, Netherlands Central Bank, Research Department.
    9. Kristy Jansen & Sven Klingler & Angelo Ranaldo & Patty Duijm, 2024. "Pension Liquidity Risk," Swiss Finance Institute Research Paper Series 24-16, Swiss Finance Institute.
    10. Lanying Sun & Changhao Su & Xinghui Xian, 2020. "Assessing the Sustainability of China’s Basic Pension Funding for Urban and Rural Residents," Sustainability, MDPI, vol. 12(7), pages 1-17, April.
    11. Yundan Guo & Li Shen, 2023. "Commercial Retirement FOFs in China: Investment and Persistence Performance Analysis," Sustainability, MDPI, vol. 15(18), pages 1-22, September.
    12. repec:dau:papers:123456789/13624 is not listed on IDEAS
    13. Matteo Bonetti, 2021. "Pension Fund Equity Performance: Herding Does Not Pay Off," Working Papers 729, DNB.
    14. Berchtold, Demian & Dichter, Oliver & Loderer, Claudio & Waelchli, Urs, 2021. "Pension risk and corporate investment distortion," Journal of Corporate Finance, Elsevier, vol. 68(C).
    15. Thomas Url, 2015. "Altersvorsorgesysteme in Europa," WIFO Studies, WIFO, number 57913, April.
    16. Rauh, Joshua D. & Stefanescu, Irina & Zeldes, Stephen P., 2020. "Cost saving and the freezing of corporate pension plans," Journal of Public Economics, Elsevier, vol. 188(C).
    17. Konradt, Maximilian, 2023. "Do pension funds reach for yield? Evidence from a new database," MPRA Paper 116209, University Library of Munich, Germany.
    18. Wang, Yong & Mao, Connie X., 2015. "Shareholder activism of public pension funds: The political facet," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 138-152.
    19. Guohui Guan & Jiaqi Hu & Zongxia Liang, 2021. "Robust equilibrium strategies in a defined benefit pension plan game," Papers 2103.09121, arXiv.org.
    20. Michail Anthropelos & Evmorfia Blontzou, 2023. "On Valuation and Investments of Pension Plans in Discrete Incomplete Markets," Risks, MDPI, vol. 11(6), pages 1-24, June.
    21. Iqbal Owadally, 2014. "Tail risk in pension funds: an analysis using ARCH models and bilinear processes," Review of Quantitative Finance and Accounting, Springer, vol. 43(2), pages 301-331, August.

    More about this item

    Keywords

    Pension funds; Asset allocation; Dynamic optimization;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:23:y:2022:i:5:d:10.1057_s41260-022-00277-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.