Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-06T09:21:18.273Z Has data issue: false hasContentIssue false
  • English
  • Français

Prudent investors: the asset allocation of public pension plans

Published online by Cambridge University Press:  23 December 2008

CHRISTIAN E. WELLER  and
JEFFREY B. WENGER
CHRISTIAN E. WELLER
Affiliation:
Associate Professor, Department of Public Policy and Public Affairs, McCormack Graduate School, University of Massachusetts Boston
JEFFREY B. WENGER
Affiliation:
Assistant Professor, Department of Public Administration and Policy, School of Public and International Affairs, The University of Georgia (e-mail: [email protected])
Get access Rights & Permissions [Opens in a new window]

Abstract

After 2000, the vast majority of defined benefit (DB) pension plans encountered a decrease in their funding ratios, largely due to a drop in asset prices. It is possible that public sector pension plans may have acted imprudently by chasing returns, once they encountered underfunding. We identify four indicators for DB plans' imprudent investment behavior: no portfolio rebalancing, employer conflicts of interest, trustee conflicts of interest, and failure to implement best investment practices. To see if public sector pension plans rebalance their portfolios, we use data from the Federal Reserve's Flow of Funds, dating from 1952 to 2007. To test for the remaining three hypotheses, we use data from the Census' State and Local Government Employee Retirement Systems data base, where consistent data for state and local government plans are available from 1993 to 2005. Our results suggest that there is no evidence that public sector plans systematically engaged in imprudent investment behavior and that this did not systematically differ after 2000 from the earlier period.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 8 , Issue 4 , October 2009 , pp. 501 - 525
Copyright
Copyright © 2008 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Almeida, B. (2007) Multi-employer plans: plan design of the future. In Ghilarducci, T. and Weller, C. (eds.) Employee Pensions: Policies, Problems, and Possibilities, Labor and Employment Relations Association Series. Ithaca, NY: ILR Press, Cornell University Press.Google Scholar
Ameriks, J. and Zeldes, S. (2004) How do household portfolio shares vary with age? Working Paper, Graduate School of Business, Columbia University of Business, New York, NY.Google Scholar
Bakshi, G. S. and Chen, Z. (1994) Baby boom, population aging, and capital markets. Journal of Business, 67(2): 165–202.CrossRefGoogle Scholar
Ballente, D. and Green, C. A. (2004) Relative risk aversion among the elderly. Review of Financial Economics, 13(3): 269–281.CrossRefGoogle Scholar
Barberis, N. (2000) Investing for the long run when returns are predictable. Journal of Finance, 55(1): 225–264.CrossRefGoogle Scholar
Black, F. (1980) The tax consequences of long run pension policy. Financial Analysts Journal (September–October): 17–23.Google Scholar
Board of Governors (BOG) (2007) Flow of funds accounts of the United States. Federal Reserve System, BOG, Washington, DC.Google Scholar
Campbell, J. Y. and Shiller, R. J. (1988) Stock prices, earnings, and expected dividends. Journal of Finance, 43(3): 661–676.CrossRefGoogle Scholar
Campbell, J. Y. and Shiller, R. (2001) Valuation ratios and the long-run stock market outlook: an update. NBER Working Paper No. 8221, National Bureau of Economic Research, Cambridge, MA.CrossRefGoogle Scholar
Campbell, J. Y. and Viceira, L. M. (1999) Consumption and portfolio decisions when expected returns are time varying. Quarterly Journal of Economics, 114(2): 433–495.CrossRefGoogle Scholar
Campbell, J. Y. and Viceira, L. M. (2002) Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. New York, NY: Oxford University Press.CrossRefGoogle Scholar
Census (2007) State and local government employee retirement systems. US Census Bureau, Washington, DC.Google Scholar
Chevalier, J. A. and Ellison, G. D. (1999) Career concerns of mutual fund managers. Quarterly Journal of Economics, 114(2): 389–432.CrossRefGoogle Scholar
Coronado, J. L., Engen, E. M., and Knight, B. (2003) Public funds and private capital markets: the investment practices and performance of state and local pension funds. National Tax Journal, 61(3): 579–594.CrossRefGoogle Scholar
Council of Institutional Investors (CII) (2006) Protecting the Nest Egg: A Primer on Defined Benefit and Defined Contribution Retirement Plans. Washington, DC: CII.Google Scholar
Craft, T. (2005) How funding ratios affect pension plan portfolio allocations. Journal of Real Estate Portfolio Management, 11(1): 29–35.CrossRefGoogle Scholar
Government Accountability Office (GAO) (2008) Defined Benefit Pension Plans: Guidance Needed to Better Inform Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity. GAO-08-692, Washington, DC: GAO.Google Scholar
Grossman, S. and Stiglitz, J. E. (1980) On the impossibility of informational efficient capital markets. American Economic Review, 70(3): 393–408.Google Scholar
Halek, M. and Eisenhauer, J. (2001) Demography and risk aversion. Journal of Risk and Insurance, 68(1): 1–24.CrossRefGoogle Scholar
Haliassos, M. and Bertaut, C. C. (1995) Why do so few hold stocks? The Economic Journal, 105(432): 1110–1129.CrossRefGoogle Scholar
International Fund Investment (IFI) (2007) Teacher retirement system of taxes goes more alternative. 19 April, www.ifilive.com.Google Scholar
Jegadeesh, N. and Titman, S. (1993) Returns to buying winners and selling losers: implications for stock market efficiency. Journal of Finance, 48: 65–91.CrossRefGoogle Scholar
Kandel, S. and Stambaugh, R. (1996) On the predictability of stock returns: an asset allocation perspective. Journal of Finance, 51: 385–424.Google Scholar
Marois, M. (2007) Calpers may move $29 billion out of stocks and bonds (Update 1). 13 December, Bloomberg.com.Google Scholar
McCarthy, D. and Miles, D. (2007) Optimal portfolio allocation for pension funds in the presence of background risk. Unpublished manuscript, London School of Economics.Google Scholar
Merton, R. C. (1969) Lifetime portfolio selection under uncertainty: the continuous time case. Review of Economics and Statistics, 51: 247–257.CrossRefGoogle Scholar
Mitchell, O. and Hsin, P. L. (1997) Public pension governance and performance. In Valdes–Prieto, S. (eds.) The Economics of Pensions: Principles, Policies, and International Experience. Cambridge, MA: Cambridge University Press, pp. 92–123.Google Scholar
Mitchell, O., Mottola, G., Utkus, S., and Yamaguchi, T. (2006) The inattentive participant: portfolio trading behavior in 401(k) plans. PRC WP 2006-5. Pension Research Council, Wharton School, University of Pennsylvania, Philadelphia, PA.CrossRefGoogle Scholar
Mossin, J. (1968) Optimal multi-period portfolio policies. Journal of Business, 41(2): 205–225.Google Scholar
Munnell, A. and Sunden, A. (2001) Investment practices of state and local pension funds: implications for social security reform. In Olivia, Mitchell (eds.) Pensions in the Public Sector. University of Pennsylvania Press.Google Scholar
National Bureau of Economic Research (2008) Business Cycle Data Base, Cambridge, MA.Google Scholar
Papke, L. (1991) The asset allocation of private pension plans. NBER Working Paper No. 3745, National Bureau of Economic Research, Cambridge, MA.CrossRefGoogle Scholar
Pomorski, L. (2006) Follow the leader: peer effects in mutual fund portfolio decisions. unpublished manuscript. Joseph L. Rotman School of Management, University of Toronto.Google Scholar
Rauh, J. (2007) Risk shifting versus risk management: investment policy in corporate pension plans. NBER Working Paper No. 13240, National Bureau of Economic Research, Cambridge, MA.CrossRefGoogle Scholar
Samuelson, P. A. (1963) Lifetime portfolio selection by dynamic stochastic programming. Review of Economics and Statistics, 51: 239–243.CrossRefGoogle Scholar
Samuelson, P. A. (1989) A case at last for age-phased reduction in equity. Proceedings of the National Academy of Sciences, 86: 9048–9051.CrossRefGoogle Scholar
Samuelson, P. A. (1994) The long-term case for equities and how it can be oversold. The Journal of Portfolio Management (fall): 15–24.CrossRefGoogle Scholar
Sirri, E. R. and Tufano, P. (1998) Costly search and mutual fund flows. Journal of Finance, 53: 1589–1622.CrossRefGoogle Scholar
Tepper, I. (1981) Taxation and corporate pension policy. Journal of Finance (March): 1–13.CrossRefGoogle Scholar
Useem, M. and Mitchell, O. S. (2000) Holders of the purse strings: governance and performance of public retirement systems. Social Science Quarterly, 81(2): 489–506.Google Scholar
Wachter, J. A. (2002) Portfolio and consumption decisions under mean-reverting returns: an exact solution for complete markets. Journal of Financial and Quantitative Analysis, 37(1): 63.CrossRefGoogle Scholar
Yang, T. and Mitchell, O. S. (forthcoming) Public pension governance, funding, and performance: a longitudinal appraisal. In John, Evans and John, Piggott (eds.) Pension Fund Governance: A Global Perspective. Northampton, MA: Edward Elgar.Google Scholar