Determinants of Expected Returns at Public Defined-Benefit Pension Plans

Abstract

Estimated expected returns are important for pension plans, as they infl uence many plan characteristics including required asset levels, annual contributions, and the extent of plan under-or overfunding. Yet, there seems to be little prior literature on the factors infl uencing these estimated future returns. In an attempt to fi ll this gap, this paper presents the results of a panel analysis of data on the determinants of such returns used by US public defi ned-benefi t (DB) pension plans for the period 2001-2011. As expected, we fi nd that real return estimates by DB public pension funds are positively related to fund size, fund age, international asset diversifi cation, state income, and corruption levels. However, more interestingly and importantly, we document that real return estimates by public US DB pension funds are positively related to cultural measures of individualism and masculinity, and negatively related to uncertainty avoidance. These results should be of much interest not only to scholars and pension benefi ciaries, but also to fund managers, other capital market participants, and policymakers. JEL Classifi cations: H3; H4; H6; I00; J3 Keywords: public pensions, defi ned benefi t pensions, estimated returns, public policy, pension underfunding, fi nance and culture.