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Determinants of Expected Returns at Public Defined-Benefit Pension Plans


Estimated expected returns are important for pension plans, as they influence 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 influencing these estimated future returns. In an attempt to fill this gap, this paper presents the results of a panel analysis of data on the determinants of such returns used by US public defined-benefit (DB) pension plans for the period 2001–2011. As expected, we find that real return estimates by DB public pension funds are positively related to fund size, fund age, international asset diversification, 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 beneficiaries, but also to fund managers, other capital market participants, and policymakers.

Keywords: public pensions, defined benefit pensions, estimated returns, public policy, pension underfunding, finance and culture.

JEL Classifications: H3; H4; H6; I00; J3


Suggested citation: Aggarwal, Raj, and John W. Goodell, 2015. “Determinants of Expected Returns at Public Defined-Benefit Pension Plans,” Federal Reserve Bank of Cleveland, Working Paper no. 15-08.

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