The Next Step: 100% Equity Allocation for Pension Plans

This article addresses whether pension plans are invested too conservatively. Over the last 25 years pension plans have been gradually increasing their equity ratios, so that today most have a little more than 60% of their assets in equities. While plan sponsors may be resistant to increasing their equity ratios much beyond current levels due to risk considerations, the authors argue that for many plans the additional risk incurred with a portfolio of 100% equities is minimal. This assertion follows from two important results that mitigate the additional portfolio risk incurred with greater equity allocations: 1) the benefits of actuarial smoothing, and 2) the diminishing relative risk of stocks versus bonds at longer investment horizons.