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Does Regulation Matter? Riskiness in Pension Asset Allocation

Author

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  • Sandra Rigot

    (University Paris North)

Abstract

We investigate the influence of investment regulations on the riskiness and procyclcality of defined-benefit (DB) pension funds' asset allocations. We provide a global comparison of the regulatory framework for public, corporate and industry pension funds in the US, Canada and the Netherlands. Derived from panel data analysis of a unique set of close to 600 detailed funds? asset allocations, our results highlight that regulatory factors are vitally important ? more so than the funds? individual and institutional characteristics, in shaping these asset allocations. In particular, risk-based capital requirements, balance sheet recognition of unfunded liabilities, lower liability discount rates, and shorter recovery periods lead pension funds to decrease their asset allocation to risky assets. Risk-based capital requirements reduce overall risky asset allocation by as much as 5%, but they do not affect the asset classes identically. While equities, real estate and mortgages are at a disadvantage, high yield bonds and commodities are slightly favored.

Suggested Citation

  • Sandra Rigot, 2015. "Does Regulation Matter? Riskiness in Pension Asset Allocation," Proceedings of International Academic Conferences 1003259, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:1003259
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    File URL: https://iises.net/proceedings/international-academic-conference-rome/table-of-content/detail?cid=10&iid=154&rid=3259
    File Function: First version, 2015
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    More about this item

    Keywords

    Solvency; Pension funds; Defined Benefit; Liability discount rate; Valuation requirements; Financial stability; Regulation;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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