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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: jwenger@uga.edu)
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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

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