How Funding Ratios Affect Pension Plan Portfolio Allocations

Timothy Craft

Journal of Real Estate Portfolio Management, 2005, vol. 11, issue 1, 29-35

Abstract: Executive Summary. This article examines how a pension plan's funding ratio can affect the portfolio allocation decision. Specifically, an asset / liability model of pension plan decision-making is developed. Typical mean-variance models estimate allocations to both public and private real estate as high as 50%. In the asset / liability model, predicted allocations to both private and public real estate are much lower and closer to what is actually observed. In addition, the results show that as a pension plan becomes more underfunded, the allocation to private real estate falls while the allocation to public real estate stays about the same. As a plan becomes more overfunded, allocations to both private and public real estate increase but still by less than what is predicted in mean-variance models.

Date: 2005
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DOI: 10.1080/10835547.2005.12089710

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