Asset Allocation and Managerial Assumptions in Corporate Pension Plans

We empirically examine the effect of regulations on pension decision-making. We find that in the face of mandatory contributions, pension plans alter their asset allocations and increase their risk taking to avoid mandatory contributions. This behavior resembles gambling for resurrection. The economic effects we document are large, representing annual active reallocations of over $103M for the average plan. We also examine the effect of regulations on pension accounting assumptions affecting net income. We find that plan sponsors increase their assumed rates of return on plan assets when subject to pension-related costs. The evidence suggests an earnings-management interpretation. Finally, we examine whether pension fund managers are tactical in their asset allocations. We find that pension fund managers are active as an investor class, but do not seem to time the market in a manner consistent with return predictability