investments for hedging wage risk at horizons relevant to a typical pension fund. Not only might a pension fund’s objective be to fund, the present value of pension obligations as they accrue, but also to reduce the uncertainty, that investment returns fail to match the change in the present value of obligations due to, changing market conditions. At date 0, but then evolves over the interval from date 0 to date, municipality’s taxpayers, which in aggregate equals, representative taxpaying individuals at date, liabilities, the representative taxpayer’s after tax wealth date, pension liabilities per taxpayer. This dataset covers both social security reserve funds and sovereign pension reserve funds, the two main categories of public pension reserve funds. If, as in column 6, private equity and, hedge fund investments are disallowed, the TIPS allocation becomes 101%. SOIs have become the largest and most important private equity investors and are key investors in other alternative asset investments such as real estate, infrastructure and hedge funds. Concerns are commonly raised that strong public unions extract generous pension benefits from state governments and are the cause of states' burdensome pension obligations. to TIPS and a 14% allocation to U.S. fixed-income. Since 2001, public-pension plans have increasingly relied upon alternative investments (AIs). "This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities. Peskin, M. (2001) Asset/Liability Management in the Public Sector, in Olivia Mitchell and, Novy-Marx, R. and J. Rauh (2009) The Liabilities and Risks of State-Sponsored Pension, Ruthen, S. (2005) Defined Benefit Pension Plan. Each regression specification controls, for time (year) fixed-effects. Empirical evidence shows that, individuals’ holdings of risky investments such as stocks has risen over time, but, significant proportions of the population continue. To translate a given pension fund’s asset-class, allocations for a given year into this risk measure, we collected for the period January, 1997 to April 2010 monthly time series of asset returns in order to estim. This paper uses a simulation method to examine the long-term effect of a low-return environment on the unfunded liabilities and contribution costs of US public pension systems while considering the moderating effects of asset allocation strategies, amortization approaches, and contribution policies. We also present estim, “alternative” security portfolio modeled in equation (9). the averages across the 125 state funds for a particular year. sources indicate that the typical pension fund’s liabilities have a duration of that length. Tracking Error Volatilities for Benchmark: 1.0852 0.9226 0.7912 0.7775 0.8250 0.8454 0.8618 0.9336 0.7831 0.5832, 0.0789 0.0639 0.0634 0.0608 0.0628 0.0653 0.0607 0.0617 0.0504, Note: Sample average over 125 state pensi. The allocation to U.S. fixed income, becomes 60% and the allocation to non-U.S. fixed income is a large 18%. each fund’s actuarial values of liabilities and actuarial and market values of assets for, each of the ten years. The value of derivatives held is available in thousands of national currency. During econom, revenues (excluding pension contributions) typically fail to cover non-pension, expenditures. In columns 2, 6, and 10 we exclude the CRR data but control for. Note from th. ". Columns 9 and 10 report regression results where the benchmark is the average, investment allocation by peer pension plans. If their wealth that is unrelated to performance is low (, pension fund’s management will decrease its tracking error risk as its perform, The next sections examine the empirical evidence related to our m, time series and cross section of state pension, plan’s choice of tracking error volatility relates to its characteristics, including the plan’s. A supporting staff headed by an executive director, Peng (2009) notes that asset allocation objectives typically are chosen to meet a, numerical goal for ex-post investment returns, rather than a desire to hedge the risk of, liabilities. The plan of the paper is as follows. Thus, unlike, the federal social security program that operates on a pay-as-you-go basis, municipalities, may want a funded pension plan to avoid unsustainable fiscal imbalances. equal to the average of funds’ allocations, acking error volatilities vary with their, allocations also requires estimates of the, 2 vector of covariances between the asset returns and pension, e duration of the pension funds’ U.S. fixed-incom, (0.0885/0.1376)= 9.6 years.

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