Wharton Pension Research Council Working Papers

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Working Paper

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Despite the integration of international capital markets and the relaxation of capital controls, U.S. defined benefit pension plans do not sufficiently diversify their assets across international holdings. In this paper, we explore whether incorporating liabilities in the asset allocation decision can help explain pension plans’ home bias. We find that incorporating pension liabilities proves not to explain pension plan home bias in the case when returns are nominal. Furthermore, when we focus on real returns, incorporating pension plan liabilities makes the home bias puzzle worse. The fact remains that U.S. defined benefit pension plans could benefit substantially from more international investment.

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©2003 Pension Research Council of the Wharton School of the University of Pennsylvania. All Rights Reserved


Research support is acknowledged from the Steven H. Sandell Grant program of the U.S. Social Security Administration (SSA) and the Michigan Retirement Research Center (MRRC). The Opinions and conclusions are solely those of the author and should not be construed as representing the opinions or policy of SSA or MRRC. The author appreciates valuable suggestions and comments from James Barber, Steven Boyce, J. David Cummins, Jeremy Gold, David Gustafson, Richard Herring, Urban Jermann, Marie-Eve Lachance, Karen Lewis, Richard Marston, David McCarthy, Olivia S. Mitchell, James Moore, Alex Muermann, Arun S. Muralidhar, Kurtay Ogunc, and Jane Pacelli. Any remaining errors are the author’s responsibility.

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Date Posted: 04 September 2019