Optimal Portfolio Allocation for Corporate Pension Funds

David McCarthy and David Miles

European Financial Management, 2013, vol. 19, issue 3, 599-629

Abstract: We model the asset allocation decision of a stylised 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.

Date: 2013
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https://doi.org/10.1111/j.1468-036X.2010.00594.x

Related works:
Working Paper: Optimal portfolio allocation for corporate pension funds (2011)
Working Paper: Optimal Portfolio Allocation for Corporate Pension Funds (2007)
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