Pension Industry


Pension Fund Asset Allocation and Liability Discount Rates,

International Centre for Pension Management

Authored by Aleksandar Andonov, Rob Bauer and Martijn Cremers


The unique regulation of U.S. public pension funds links their liability discount rate  to the expected return on assets, which gives them incentives to invest more in risky assets in order to report a better  funding  status.  Comparing  public  and  private pension funds in the U.S., Canada, and Europe, we find that U.S. public pension  funds act on their regulatory incentives.  U.S. public pension funds with a higher level of under-funding per participant, as well as funds with more politicians and elected plan participants serving on the board, take more risk and use higher discount rates. The increased risk-taking by U.S. public funds is negatively related to their performance.


Brian O’Donnell, Executive-in-Residence, Global Risk Institute

This month we build upon our ongoing collaboration with the International Centre for Pension Management (ICPM), an association of 41 pension management firms from around the world.  The ICPM conducts leading edge research for the pension fund industry, along with hosting webinars, discussion forums and a Board Education Program to promote education for Board members across the industry.  The Global Risk Institute is a member of the ICPM, and contributes research resources particularly for projects focusing on risk management in the pension industry. 

Below is our first publication in collaboration with ICPM, and is an excellent research paper on asset allocation and discount rates.  All readers who have an interest in both pension industry risks and potential systemic risks will find this article of interest.  The authors, Aleksandar Andonov, Rob Bauer and Martijn Cremers explore the state of public defined programs across the United States, where the methodology for selecting a discount rate for the program’s liability (payout to members over time) is having significant implications for asset allocation and risk management.  The issue emanates from the pension accounting rules outlined in the Government Accounting Standards Board, which calls for pension fund liabilities be discounted at the rate being earned by the pension funds’ assets;   in most other jurisdictions the discount rate is divorced from the asset side of the balance sheet and based, for example, on a spread over a long term government bond. 

Mr. Andonov, Mr. Bauer and Mr. Cremers explore the implications of this accounting methodology on the asset allocation and performance of the pension funds.  What they find is that such funds are incented to hold a riskier asset portfolio, despite their members’ demographic  profile and risk appetite.  Such funds are shown to include much higher levels of equities and alternative assets (including private equities).  Board composition of public funds, often including political appointees, seem to have a political motivation to increase risk asset holding, which leads to a higher discount rate on their liabilities, which lowers their calculated (and publicly disclosed) funding gap, all of which then delays requirements to find a way to fund the shortfall (either through politically difficult tax increases or program spending cuts).  The pension funds are therefore more exposed to equity / general economy risk, which will likely come home to roost some day.

Use the link below to download the details report of  ICPM's findings, which builds out and explores the above themes.






Aleksander Andonov

Aleksandar Andonov is an Assistant Professor in Finance at the Erasmus School of Economics, Erasmus University Rotterdam. He completed his PhD in Finance at Maastricht University. In his research, Aleksandar focuses on institutional investors, in particular pension funds and the money management industry, investigating the asset allocation and performance of these investors in public and private markets. His research ideas and findings have been presented at academic and industry conferences, and have been covered in popular financial media, such as the Economist and Financial Times. At Erasmus University, Aleksandar teaches master courses on asset management and behavioral finance.



Martijn Cremers

K.J. Martijn Cremers joined the University of Notre Dame as Professor of Finance in 2012. Prior to that, he was a faculty at Yale School of Management from 2002 – 2012 after obtaining his PhD in finance from the Stern School of Business at New York University. Hailing from the Netherlands, his undergraduate degree in Econometrics is from the VU University Amsterdam (1993-1997). Professor Cremers' research focuses on empirical issues in investments and corporate governance. His academic work has been published in top academic journals such as the Journal of Finance, the Review of Financial Studies and the Journal of Financial Economics. His research has also been covered in newspapers like the Wall Street Journal, the Financial Times and numerous others.  He is an Associate Editor at the Review of Finance (2010-) and previously was an Associate Editor of the Review of Financial Studies (2009-2012), and serves on the Editorial Board of JAAF – a Journal of Accounting, Finance & Law (2012-) and of European Financial Management (2012-). At Notre Dame, he teaches courses on fixed income markets and corporate governance to MBA and undergraduate students.



Rob Bauer

Rob Bauer is Professor of Finance (chair: Institutional Investments) at Maastricht University, School of Business and Economics in the Netherlands. In addition, Rob is managing director of an investment consulting firm in which he advises pension funds and institutional asset managers on pension and investments related subjects. His present academic research focus is on pension funds, mutual funds, behavioral finance, socially responsible investments (SRI) and corporate governance.

His academic work has been published in various professional and academic (international) research journals. Rob is Associate Director, Programs, of the International Centre for Pension Fund Management (ICPM) at the Rotman School of Management in Toronto, director of the Netspar-UM SBE Academy and director of the European Centre for Corporate Engagement (ECCE) at Maastricht University. Rob is also a senior researcher of Netspar. Moreover, he teaches at various executive courses.