Public Pensions Show Prudent Investment Behavior

November 24, 2008 ( - A new analysis of public pension investment data indicates that public plans exhibit prudent investment behavior even during volatile market conditions.

A press release from the National Institute of Retirement Security (NIRS) said the study concludes that public pension plans are prudent investors because they:

  • Actively rebalance investments in response to price changes.
  • Do not get caught up in a “herd mentality,” but rather follow the best investment practices in the industry.  State plans, in particular, systematically follow the practices of performance leaders.
  • Hold higher risk assets when funding levels are higher, and assess their financial situation before modifying the plan’s asset allocation.  If anything, public pensions are somewhat overly cautious following periods of lower funding, indicating they avoid “chasing returns.”
  • Hold smaller amounts of stocks when employers face higher contribution rates, indicating that public pensions avoid pressure to invest more aggressively after experiencing losses.

Report co-author Dr. Jeffrey Wenger remarked in the press release: “The results underscore that public pensions are suitable for plan participants when debt and equity markets are tranquil or volatile.  Policymakers, workers, and taxpayers should value the retirement safety and economic efficiencies of defined benefit pensions that exhibit professional and prudent asset management patterns.”

In addition, using economic tools such as descriptive statistics and multivariate analysis, the researchers examined public pension plan data from 1993 to 2005 and found public pension plans avoid the “moral hazard” of making risky investment decisions believing that someone else will cover for any mistakes, the study report said. Plans’ stock allocations are larger in the period after higher funding levels are observed, indicating investment officials wait to know what their financial situation is before they change the risk exposure of their portfolio.

Public pension plans also avoid so-called employer conflicts of interest whereby increased demands for contributions lead to pressure from employers to chase returns by taking on more risk. Public pension plans tend to hold smaller amounts of stocks when sponsors are faced with the need to contribute more to their pension plans, fleeing from risk rather than rushing toward more risk.

“[The] data underscore that public pension plans are suitable for employees and taxpayers alike whether financial markets are tranquil or volatile, on the rise or falling,” the report says.

The report, “In it for the Long Haul: The Investment Behavior of Public Pensions,” can be accessed here .