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The asset allocation of defined benefit pension plans: the role of sponsor contributions

Author

Listed:
  • Artem Dyachenko

    (University of Trier)

  • Patrick Ley

    (University of Trier)

  • Marc Oliver Rieger

    (University of Trier)

  • Alexander F. Wagner

    (University of Zürich)

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.

Suggested Citation

  • Artem Dyachenko & Patrick Ley & Marc Oliver Rieger & Alexander F. Wagner, 2022. "The asset allocation of defined benefit pension plans: the role of sponsor contributions," Journal of Asset Management, Palgrave Macmillan, vol. 23(5), pages 376-389, September.
    • Handle: RePEc:pal:assmgt:v:23:y:2022:i:5:d:10.1057_s41260-022-00277-x
    DOI: 10.1057/s41260-022-00277-x
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    References listed on IDEAS

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    More about this item

    Keywords

    Pension funds; Asset allocation; Dynamic optimization;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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