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An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans

Author

Listed:
  • Nancy Mohan

    () (University of Dayton)

  • Ting Zhang

    () (University of Dayton)

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.

Suggested Citation

  • Nancy Mohan & Ting Zhang, 2011. "An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans," Upjohn Working Papers and Journal Articles 12-179, W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:weupjo:12-179
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    More about this item

    Keywords

    Public pension funds; investment risk; state financial constraints; risk transfer; government accounting;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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