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Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model

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  • Jacob A. Bikker
  • Dirk W. G. A. Broeders
  • David A. Hollanders
  • Eduard H. M. Ponds

Abstract

This paper examines the impact of participants' age distribution on the asset allocation of Dutch pension funds, using a unique data set of pension fund investment plans for 2007. Theory predicts a negative effect of age on (strategic) equity exposures. We observe that pension funds do indeed take the average age of their participants into account. However, the average age of active participants has been incorporated much more strongly in investment behaviour than the average ages of retired or dormant participants. This suggests that both employers and employees, who dominate pension fund boards, tend to show more interest in active participants. A one-year higher average age in active participants leads to a significant and robust reduction in the strategic equity exposure by around 0.5 percentage point. Larger pension funds show a stronger age-equity exposure effect than smaller pension funds. This age-dependent asset allocation of pension funds aligns with the original life-cycle model by which young workers should invest more in equity than older workers because of their larger human capital. Other factors, viz. fund size, funding ratio, and average pension wealth of participants, influence equity exposure positively and significantly, in line with theory. Pension plan type and pension fund type have no significant impact.

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Bibliographic Info

Article provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.

Volume (Year): 79 (2012)
Issue (Month): 3 (09)
Pages: 595-618

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Handle: RePEc:bla:jrinsu:v:79:y:2012:i:3:p:595-618

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References

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  1. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
  2. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  3. de Vries, Casper G & Teulings, Coen N, 2004. "Generational Accounting, Solidarity and Pension Losses," CEPR Discussion Papers 4209, C.E.P.R. Discussion Papers.
  4. Jacob A. Bikker & Laura Spierdijk & Paul Finnie, 2007. "Stock market performance and pension fund investment policy: rebalancing, free float, or market timing?," DNB Working Papers 156, Netherlands Central Bank, Research Department.
  5. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, September.
  6. Christian Gollier, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," CESifo Working Paper Series 1969, CESifo Group Munich.
  7. Jan de Dreu & Jacob Bikker, 2009. "Pension fund sophistication and investment policy," DNB Working Papers 211, Netherlands Central Bank, Research Department.
  8. Deborah J. Lucas & Stephen P. Zeldes, 2009. "How Should Public Pension Plans Invest?," American Economic Review, American Economic Association, vol. 99(2), pages 527-32, May.
  9. Ponds, E.H.M., 2008. "Naar meer Jong en Oud in Collectieve Pensioenen," Open Access publications from Tilburg University urn:nbn:nl:ui:12-378198, Tilburg University.
  10. Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006 169, Money Macro and Finance Research Group.
  11. Bikker, Jacob A. & De Dreu, Jan, 2009. "Operating costs of pension funds: the impact of scale, governance, and plan design," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(01), pages 63-89, January.
  12. Cui, Jiajia & Jong, Frank De & Ponds, Eduard, 2011. "Intergenerational risk sharing within funded pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(01), pages 1-29, January.
  13. Willem Heeringa, 2008. "Optimal life cycle investment with pay-as-you-go pension schemes: a portfolio approach," DNB Working Papers 168, Netherlands Central Bank, Research Department.
  14. Ponds, E.H.M. & Riel, B. van, 2009. "Sharing risk: The Netherlands' new approach to pensions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3129589, Tilburg University.
  15. Gerber, David S. & Weber, René, 2007. "Demography and investment behavior of pension funds: evidence for Switzerland," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(03), pages 313-337, November.
  16. Bovenberg, A.L. & Koijen, R.S.J. & Nijman, T.E. & Teulings, C.N., 2007. "Saving and investing over the life cycle and the role of collective pension funds," Open Access publications from Tilburg University urn:nbn:nl:ui:12-301942, Tilburg University.
  17. Ponds, Eduard H. M. & Riel, Bart Van, 2009. "Sharing risk: the Netherlands' new approach to pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(01), pages 91-105, January.
  18. Alestalo, Noora & Puttonen, Vesa, 2006. "Asset allocation in Finnish pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(01), pages 27-44, March.
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Cited by:
  1. Jakob Bikker & Thijs Knaap & Ward Romp, 2011. "Real Pension Rights as a Control Mechanism for Pension Fund Solvency," DNB Working Papers 311, Netherlands Central Bank, Research Department.
  2. Xiaohong Huang & Ronald Mahieu, 2012. "Performance Persistence of Dutch Pension Funds," De Economist, Springer, vol. 160(1), pages 17-34, March.
  3. Huang, X. & Mahieu, R.J., 2012. "Performance persistence of Dutch pension plans," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5556493, Tilburg University.
  4. Mohan, Nancy & Zhang, Ting, 2014. "An analysis of risk-taking behavior for public defined benefit pension plans," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 403-419.
  5. Dirk Broeders & Paul Hilbers & David Rijsbergen, 2013. "What drives pension indexation in turbulent times? An empirical examination of Dutch pension funds," DNB Working Papers 368, Netherlands Central Bank, Research Department.

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