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The Asset Allocation of Defined Benefit Pension Plans: The Role of Sponsor Contributions


Dyachenko, Artem; Ley, Patrick; Rieger, Marc Oliver; Wagner, Alexander F (2022). The Asset Allocation of Defined Benefit Pension Plans: The Role of Sponsor Contributions. Journal of Asset Management, 23:376-389.

Abstract

What percentage of its assets should a defined benefit pension plan invest into stocks as its funding ratio varies? We show that the answer to this question depends on the institutional setting and in particular on the extent to which the sponsoring company contributes to the fund as the funding ratio varies. We consider two settings: in one setting, the sponsoring company contributes to its pension fund only if the funding ratio is below the target level (as is the case, for example, in the US); in the other setting, the sponsoring company always contributes to its pension fund (as is the case, for example, in Switzerland). We show that these two institutional frameworks lead to two different dynamics, conditional distributions of the funding ratios, and relationships between the current funding ratio and investment into stocks. For settings like the US, that relation is non-monotonic while for settings like in Switzerland, it is monotonically decreasing. Previous empirical findings point towards a similar pattern.

Abstract

What percentage of its assets should a defined benefit pension plan invest into stocks as its funding ratio varies? We show that the answer to this question depends on the institutional setting and in particular on the extent to which the sponsoring company contributes to the fund as the funding ratio varies. We consider two settings: in one setting, the sponsoring company contributes to its pension fund only if the funding ratio is below the target level (as is the case, for example, in the US); in the other setting, the sponsoring company always contributes to its pension fund (as is the case, for example, in Switzerland). We show that these two institutional frameworks lead to two different dynamics, conditional distributions of the funding ratios, and relationships between the current funding ratio and investment into stocks. For settings like the US, that relation is non-monotonic while for settings like in Switzerland, it is monotonically decreasing. Previous empirical findings point towards a similar pattern.

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Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Business and International Management
Social Sciences & Humanities > Strategy and Management
Social Sciences & Humanities > Information Systems and Management
Scope:Discipline-based scholarship (basic research)
Language:English
Date:September 2022
Deposited On:30 Dec 2022 06:43
Last Modified:28 Jun 2024 01:37
Publisher:Palgrave Macmillan
ISSN:1470-8272
OA Status:Hybrid
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1057/s41260-022-00277-x
Official URL:https://doi.org/10.1057/s41260-022-00277-x
Other Identification Number:merlin-id:22551
  • Content: Published Version
  • Licence: Creative Commons: Attribution 4.0 International (CC BY 4.0)