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An Examination of ERR and Asset Allocation in Public Pension Plans
Author(s) -
Eaton Tim V.,
Nofsinger John R.
Publication year - 2001
Publication title -
financial accountability and management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.661
H-Index - 44
eISSN - 1468-0408
pISSN - 0267-4424
DOI - 10.1111/1468-0408.00124
Subject(s) - return on assets , pension , weighted average return on assets , equity (law) , rate of return , business , asset allocation , assets under management , actuarial science , pension plan , return on equity , finance , asset (computer security) , fixed asset , economics , portfolio , microeconomics , production (economics) , profitability index , computer security , political science , computer science , law
In this paper, we examine the usefulness of expected rates of return (ERR) for public pension plans. Specifically, we test the correlation between the expected rate of return on plan assets and asset allocation. We also examine the predictive power of ERR on the actual returns of the pension assets. We find that the correlation between expected return and the percentage of assets that are equity securities is relatively weak. Further, we find that the percentage of assets that are equity securities is a much better predictor of actual returns than the disclosed expected return in public pension plans. These results provide evidence to support SFAS No. 87 , which requires the disclosure of plan assets and against recently promulgated SFAS No. 132 , which eliminates this disclosure requirement. The evidence also supports GASB 25'sStatement of Net Plan Assets .