Implications of risk tolerance on establishing an effective investment strategy for public pension plans

While a strong rebound in risk assets has occurred since the Global Financial Crisis, the funded status of many public pensions has stagnated. The future health of these plans is dependent on many factors and faces many risks, including low prospective returns, unfavorable plan demographics, and stressed plan sponsor financial conditions. This paper will explore these risks and provide a framework for discussion and evaluation designed to ensure a plan’s investment program is appropriately aligned with its risk tolerance. Although we focus on public pension plans here, with modest adjustments the described approach can be applied to any institutional investor with well-defined investment objectives and liabilities.