Teacher Pension Workshop: Connecting Evidence-Based Research to Pension Reform

Investment Risk and Its Potential Consequences for Teacher Retirement Systems and School Districts

by Don Boyd, Yimeng Yin

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Public pension plans in the United States have more than $4 trillion of invested assets, more than two-thirds of which are in equities and similar assets. Unlike private pension funds, public pension funds have increased their equity allocations dramatically over the last two decades, making their investment returns and unexpected investment gains and losses far more volatile than before. This means that plan funded status and contributions requested of governments also are more volatile than before, increasing the risks to taxpayers, stakeholders in government services and investments, and workers and retirees. One important way to examine the impact of investment-return volatility upon plan funded status and contributions is with a stochastic simulation model that draws investment returns from a probability distribution. We have constructed a pension simulation does that, and we use it to examine the interplay between investment return volatility and funding policy, and to examine the potential consequences of different investment return environments.

Table of Contents

  • Chapter One

    Summary

  • Chapter Two

    Introduction

  • Chapter Three

    Risky investments put contributions and plan funding on a roller coaster ride

  • Chapter Four

    Beyond individual simulations: Measures we use to evaluate results

  • Chapter Five

    Investment risk-taking and the changing investment-return environment

  • Chapter Six

    Investment risk and funding policy

  • Chapter Seven

    Teacher retirement systems face special risks

  • Chapter Eight

    Conclusions

  • Chapter Nine

    Appendix

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