Abstract
This paper investigates whether public pension plans' risk-taking behavior has changed after the recent financial crisis of 2008 by testing two contrasting hypotheses on pension funding: risk transfer and risk management hypotheses. In managing pension assets, public pension plan sponsors may have an incentive for risk transfer because underfunded pension obligations can be shifted to future taxpayers (risk transfer hypothesis). Facing a budget constraint, they may also have an incentive for risk management because they would prefer to stabilize their contributions (risk management hypothesis). Using a sample of 126 public pension plans for the period of 2001-2011, this paper finds that public pension plans' risk-taking behavior has changed after the financial crisis of 2008. Before the financial crisis, public pension plan sponsors invest more in equities when a large required contribution is expected, which is consistent with the risk transfer hypothesis. After the financial crisis, however, the plan sponsors invest less in equities when a large required contribution is expected, which is consistent with the risk management hypothesis. The findings suggest that public pension plans' risk-taking behavior is not constant over time, but can be varied depending on market conditions.