Long-Term Asset Allocation in Pension Funds

It is often argued that as long-term investors, pension funds can sustain larger allocations to equity. Although intuitively appealing, it is not clear why capital markets would provide a better opportunity set to investors with long investment horizons. But if in fact the equity risk-premium is slowly mean-reverting then a pension fund committing to a long-term investment strategy would realize a better risk-return trade-off than other investors. Furthermore, the optimal investment strategy is the aggregate of optimizing the asset allocation for each individual benefit payment.