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Pension funds’ asset allocation and participant age: a test of the life-cycle model

Author

Listed:
  • J.A. Bikker
  • D.W.G.A Broeders
  • D. A. Hollanders
  • E. 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.

Suggested Citation

  • J.A. Bikker & D.W.G.A Broeders & D. A. Hollanders & E. H.M. Ponds, 2009. "Pension funds’ asset allocation and participant age: a test of the life-cycle model," Working Papers 09-25, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:0925
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    Cited by:

    1. Scholz, Michael & Nielsen, Jens Perch & Sperlich, Stefan, 2015. "Nonparametric prediction of stock returns based on yearly data: The long-term view," Insurance: Mathematics and Economics, Elsevier, vol. 65(C), pages 143-155.
    2. Karen A. Tumanyants & Eugenia V. Gulyaeva, 2016. "Individual Choice of a Pension Fund in Russia: Are the Investment Results of the Fund Important?," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1328-1337.
    3. Xiaohong Huang & Ronald Mahieu, 2012. "Performance Persistence of Dutch Pension Funds," De Economist, Springer, vol. 160(1), pages 17-34, March.
    4. Molenaar, R. & Ponds, E.H.M., 2011. "Risk Sharing and Individual Lifecycle Investing in Funded Collective Pensions," Other publications TiSEM b036a69d-317f-41c5-9581-f, Tilburg University, School of Economics and Management.
    5. Scholz, Michael & Sperlich, Stefan & Nielsen, Jens Perch, 2016. "Nonparametric long term prediction of stock returns with generated bond yields," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 82-96.
    6. Wilson Ngugi & Amos Njuguna, 2018. "Nexus Between Pension Fund Size, Design and Investment Strategy: A Review of Occupational Retirement Benefits Schemes in Kenya," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(3), pages 108-116, July.
    7. Alserda, Gosse A.G. & Dellaert, Benedict G.C. & Swinkels, Laurens & van der Lecq, Fieke S.G., 2019. "Individual pension risk preference elicitation and collective asset allocation with heterogeneity," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 206-225.
    8. Laurens Defau & Lieven De Moor, 2018. "The impact of plan and sponsor characteristics on pension funds’ asset allocation and currency diversification," Journal of Asset Management, Palgrave Macmillan, vol. 19(1), pages 27-37, January.
    9. Janko Gorter & Jacob A. Bikker, 2013. "Investment risk taking by institutional investors," Applied Economics, Taylor & Francis Journals, vol. 45(33), pages 4629-4640, November.
    10. repec:aia:aiaswp:wp99 is not listed on IDEAS
    11. Ioannis Kyriakou & Parastoo Mousavi & Jens Perch Nielsen & Michael Scholz, 2021. "Forecasting benchmarks of long-term stock returns via machine learning," Annals of Operations Research, Springer, vol. 297(1), pages 221-240, February.
    12. Huang, X. & Mahieu, R.J., 2012. "Performance persistence of Dutch pension plans," Other publications TiSEM 3dba651c-bb31-443f-963c-4, Tilburg University, School of Economics and Management.
    13. Barbara Alemanni & Pierpaolo Uberti, 2019. "What Are Investors Afraid of? Finding the Big Bad Wolf," IJFS, MDPI, vol. 7(3), pages 1-12, July.
    14. Dirk Broeders & Paul Hilbers & David Rijsbergen & Ningli Shen, 2014. "What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds," De Economist, Springer, vol. 162(1), pages 41-70, March.
    15. J.A. Bikker & T. Knaap & W.E. Romp, 2011. "Real Pension Rights as a Control Mechanism for Pension Fund Solvency," Working Papers 11-15, Utrecht School of Economics.
    16. Laurens Defau & Lieven De Moor, 2021. "The investment behaviour of pension funds in alternative assets: Interest rates and portfolio diversification," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1424-1434, January.

    More about this item

    Keywords

    Pension funds; strategic equity allocation; lifecycle saving and investing;
    All these keywords.

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