Defined Benefit Pension Plan Liabilities and International Asset Allocation

Abstract

Despite the integration of international capital markets and the relaxation of capital controls, U.S. defined benefit pension plans do not sufficiently diversify their assets across international holdings. In this paper, we explore whether incorporating liabilities in the asset allocation decision can help explain pension plans’ home bias. We find that incorporating pension liabilities proves not to explain pension plan home bias in the case when returns are nominal. Furthermore, when we focus on real returns, incorporating pension plan liabilities makes the home bias puzzle worse. The fact remains that U.S. defined benefit pension plans could benefit substantially from more international investment.

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Project

• UM03-D2: Dissertation Research: “Defined Benefit Pension Plan Liabilities and International Asset Allocation”

Paper ID

WP 2003-058

Publication Type

Working Paper

Publication Year

2003