Working Paper: CEPR ID: DP8198
Authors: David McCarthy; David K Miles
Abstract: We model the asset allocation decision of a stylized corporate defined benefit pension plan in the presence of hedgeable and unhedgeable risks. We assume that plan fiduciaries--who make the asset allocation decision--face non-linear payoffs linked to the plan?s funding status because of the presence of pension insurance and a sponsoring employer who may share any shortfall or pension surplus. We find that even simple asymmetries in payoffs have large and highly persistent effects on asset allocation, while unhedgeable risks exert only a small effect. We conclude that institutional details are crucial in understanding DB pension asset allocation.
Keywords: corporate balance sheets; pension funds; portfolio allocation
JEL Codes: G11; G23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asymmetries in pension fund governance (G23) | Asset allocation decisions (G11) |
| Sharing of surpluses and deficits (H62) | Asset allocation decisions (G11) |
| Governance structures (G38) | Investment strategies (G11) |
| Governance features (G38) | Asset allocation outcomes (G11) |
| Unhedgeable risks (D81) | Asset allocation decisions (G11) |