DETERMINANTS OF PUBLIC PENSION PLAN INVESTMENT RETURN. The role of fund value maximization and public choice theory

Marguerite Schneider and Fariborz Damanpour

Public Management Review, 2001, vol. 3, issue 4, 551-573

Abstract: Public pension plans are a major type of institutional owner during the new era of investor capitalism, yet little is known about them. Based upon fund value maximization (FVM) and public choice theory (PCT), we develop hypotheses on the determinants of plan performance as measured by plan annual investment return. FVM espouses that the plan's fund or investment portfolio will be invested to maximize return for a given level of risk, while PCT holds that agency costs are significant in the public sector, and will have a negative effect on plan return. Using biennial pension plan data for 1992–96 for several hundred plans, we found that fund value maximization has a much greater influence on plan performance, but that plan performance is also subject to agency costs associated with public choice theory.

Date: 2001
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DOI: 10.1080/14616670110070604

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