Investment Risk-Taking by Public Pension Plans: Potential Consequences for Pension Funds, State and Local Governments, and Stakeholders in Government

Source: Donald J. Boyd and Yimeng Yin, Rockefeller Institute of Government, Pension Simulation Project, July 7, 2017

Public pension plans in the United States have $3.8 trillion of invested assets, more than two-thirds of which are in equities and similar assets. Unlike private pension funds, public pension funds have increased their equity allocations dramatically over the last two decades, making their investment returns and unexpected investment gains and losses far more volatile than before. This means that plan funded status and contributions requested of governments also are more volatile than before, increasing the risks to taxpayers, stakeholders in government services and investments, and workers and retirees.

One important way to examine the impact of investment-return volatility upon plan funded status and contributions is with a stochastic simulation model that draws investment returns from a probability distribution. We have constructed a pension simulation does that, and we use it to examine the interplay between investment return volatility and funding policy, and to examine the potential consequences of different investment return environments….
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