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How Funding Ratios Affect Pension Plan Portfolio Allocations

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  • Timothy Craft

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.

Suggested Citation

  • Timothy Craft, 2005. "How Funding Ratios Affect Pension Plan Portfolio Allocations," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 11(1), pages 29-35, January.
    • Handle: RePEc:taf:repmxx:v:11:y:2005:i:1:p:29-35
    DOI: 10.1080/10835547.2005.12089710
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