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Determinants of Expected Returns at Public Defined-Benefit Pension Plans

Author

Listed:
  • Raj Aggarwal
  • John Goodell

Abstract

Estimated expected returns are important for pension plans, as they influence many plan characteristics including required asset levels, annual contributions, and the extent of plan under- or overfunding. Yet, there seems to be little prior literature on the factors influencing these estimated future returns. In an attempt to fill this gap, this paper presents the results of a panel analysis of data on the determinants of such returns used by US public defined-benefit (DB) pension plans for the period 2001?2011. As expected, we find that real return estimates by DB public pension funds are positively related to fund size, fund age, international asset diversification, state income, and corruption levels. However, more interestingly and importantly, we document that real return estimates by public US DB pension funds are positively related to cultural measures of individualism and masculinity, and negatively related to uncertainty avoidance. These results should be of much interest not only to scholars and pension benefi ciaries, but also to fund managers, other capital market participants, and policymakers.

Suggested Citation

  • Raj Aggarwal & John Goodell, 2015. "Determinants of Expected Returns at Public Defined-Benefit Pension Plans," Working Papers (Old Series) 1508, Federal Reserve Bank of Cleveland, revised 21 May 2015.
  • Handle: RePEc:fip:fedcwp:1508
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    More about this item

    Keywords

    estimated returns; public policy; defined benefit pensions; public pensions; pension underfunding; finance and culture;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • I00 - Health, Education, and Welfare - - General - - - General
    • H4 - Public Economics - - Publicly Provided Goods

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