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Pension Funds — A Company Manager ' s View

Classical financial theory offers a normative prescription for pension fund asset allocation that rejects the widely adopted portfolio selection theory favored by practitioners in favor of close asset and liability matching. In this paper, we search for positive theory to explain actual observed behavior. We question whether the classical theory can accommodate this actual observed behavior by allowing only for issues affecting the principals (pension scheme members and sponsoring company shareholders) and conclude that it is unlikely that a full explanation can be obtained by this analysis alone. Instead we propose that the roles of agents and the interests of corporate insiders need to be considered in order to explain observed behavior. We argue that the agents involved may themselves be behaving quite rationally in terms of their own welfare, and this provides a simple explanation for actual behavior without rejecting the underlying principles of classical theory.