Private Equity Basics #52: Pensions "Underperform Benchmarks by About 51 Basis Points a Year” and “Returns in Alternatives are 241 Basis Points Lower
“U.S. public pension funds change their asset allocation in order to manage their liability discount rate and the reported funding level, rather than to respond to the available investment opportunities or asset-liability considerations. However, if asset allocation decisions are in part driven by regulatory incentives, U.S. public pension funds may be looking for additional investments in risky assets during periods when there are fewer attractive investment opportunities or when they have limited capacity to select and monitor additional risky investments. In this case, we would expect them to underperform.”
“We find that U.S. public plans underperform the benchmarks by about 51 basis points a year. … U.S. public pension funds have annual returns in equity that are 24 basis points lower and returns in alternative assets that are 241 basis points lower.”
Comments and dialogue are welcome, especially if you know of additional high-quality empirical research!
Any insight into how a portfolio allocation affects liability discount rates? This makes absolutely no economic sense to me. Then again what makes sense to me is discounting liabilities at a rate that reflects the uncertainty associated with the liabilities. In practice I imagine you can guess how many 90 year old pensioners will be around in 10 years by counting the 80 year olds and making an informed guess as to how many will make it to 90 with a good degree of certainty.
Chief Economist
4 年John L Bowman, CFA Hossein Kazemi, PhD, CFA Ludovic Phalippou Mitch Bollinger, CFA, CAIA Richard Ennis Aleksandar Andonov Rob Bauer Martijn Cremers