Pension Plan Asset Allocations in an Age of Zero Interest Rates: Risks

Abstract

Since the financial crisis of 2008, the financial markets have been subject to some unusual strains and influences. Many observers believe US equity markets are overvalued, while yields on high-quality debt instruments are at historic lows. In such an environment, managers of defined benefit pension plans may have difficulty finding investments which can yield the levels of returns which are expected, without shouldering excessive risks. The purpose of this paper is to discuss the problems and perils faced by asset managers for defined benefit pension plans, to examine changes in asset allocations over the past 10 years, and to discuss the risks faced in the current environment.