Overperformance of The Underfunded: An Analysis of Pension Funds' Portfolio Choice
Open Access
Author:
Eisel, Andrew
Area of Honors:
Interdisciplinary in Economics and Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
Richard Joseph Bundro, III, Thesis Supervisor Brian Spangler Davis, Thesis Honors Advisor Ruilin Zhou, Thesis Supervisor Nima Haghpanah, Thesis Honors Advisor Bee Yan Roberts, Faculty Reader
Pensions are an attractive benefit most commonly offered to state and municipal employees that promise guaranteed income for life upon retirement. However, a troubling trend of reduced funding has left many public pension funds with future obligations that far exceed their accumulated assets, causing doubt amongst public workers that their promised retirement income is secure. Pension fund managers are tasked with deploying an investment strategy that preserves and increases the value of contributed assets. Using mean-variance optimization and the Sharpe ratio, my research suggests that through diversification and strategic changes in portfolio composition, underfunded pensions outperform their fully funded counterparts on a risk-adjusted return basis.
