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Navigating The Public Pension Landscape: An Examination Of Asset Allocations

Trang Hoang and Anh Tuan Nguyen
PFM, Vol. 22 No. 1, 1-34 (2023)

The volatility of financial markets has highlighted the sensitivity of pension funding to pension investment management and the risk exposure of pension investment portfolios. In this study, we examine the asset allocations of U.S state and local governments defined-benefit plans to gain a better understanding on how those public pension plans manage their portfolio’s risks. Using the data from over 90 public pension plans from 2007 to 2018, we found that pension plans that have a higher percentage of ex-official trustees, a higher average investment return, and a higher percentage pension contribution are less likely to invest in risky assets, whereas a plan that has a higher discount rate, a higher percentage of unionization among public sector employees, and a higher ratio of retirees to active employees is more likely to have higher shares of risky assets in their portfolio. Our results also suggest the herding effects that asset allocations of CalPERS and “last-year winner” plans are mimicked by other public pension plans. Given the strong correlation between a pension plan’s status and its portfolio’s risk profile, this study provides pension administrators and public managers with important insights to navigate the shift in asset allocations in the public pension landscape more effectively.

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