Strategic Asset Allocation for Pension Plans

Abstract

Academic research on asset allocation has had a strong influence on the investment policies of large institutional investors, particularly endowments and pension funds. This article summarizes recent research on asset allocation and discusses its implications for the management of pension plans. The first part asks a basic question about pension investing: who controls the asset-allocation decision? One view is that the asset-allocation decision for a pension fund is made by those responsible for funding the plan liabilities (‘plan sponsors’), or agents acting on their behalf. An alternative view is that the decision is made by the beneficiaries of the plan, or fiduciaries acting on their behalf. In defined-contribution (DC) pension plans, there is no conflict between these two views because the same individuals are plan sponsors and beneficiaries. In defined- benefit (DB) pension plans, however, plan sponsors are the shareholders of corporations (in corporate plans) and taxpayers (in public plans), while the beneficiaries of the plan are employees.

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