IDEAS home Printed from https://ideas.repec.org/p/dnb/dnbwpp/223.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Jacob A. Bikker & Dirk W.G.A. Broeders & David A. Hollanders & Eduard H.M. Ponds, 2009. "Pension funds' asset allocation and participant age: a test of the life-cycle model," DNB Working Papers 223, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:223
    as

    Download full text from publisher

    File URL: https://www.dnb.nl/binaries/Pension%20funds%20asset%20allocation_tcm46-224135.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, vol. 62(5), pages 2123-2167, October.
    2. Jacob A. Bikker & Dirk W.G.A. Broeders & Dirk Jan de Dreu, 2010. "Stock Market Performance and Pension Fund Investment Policy: Rebalancing, Free Float, or Market Timing?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 53-79, June.
    3. Ponds, E.H.M. & van Riel, B., 2009. "Sharing risk : The Netherlands' new approach to pensions," Other publications TiSEM dffdb2a2-5a3c-45e1-b166-c, Tilburg University, School of Economics and Management.
    4. 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.
    5. 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," Other publications TiSEM 6eab1341-eda5-4f21-8c06-8, Tilburg University, School of Economics and Management.
    6. 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.
    7. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    8. Ponds, E.H.M., 2008. "Naar meer Jong en Oud in Collectieve Pensioenen," Other publications TiSEM a2185565-3ea5-442d-ba67-b, Tilburg University, School of Economics and Management.
    9. Deborah J. Lucas & Stephen P. Zeldes, 2009. "How Should Public Pension Plans Invest?," American Economic Review, American Economic Association, vol. 99(2), pages 527-532, May.
    10. Coen Teulings & Casper Vries, 2006. "Generational Accounting, Solidarity and Pension Losses," De Economist, Springer, vol. 154(1), pages 63-83, March.
    11. Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
    12. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
    13. 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.
    14. J. de Dreu & J.A. Bikker, 2009. "Pension fund sophistication and investment policy," Working Papers 09-13, Utrecht School of Economics.
    15. 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.
    16. 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.
    17. 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.
    18. 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.
    19. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yaniv Azoulay & Andrey Kudryavtsev & Shosh Shahrabani, 2016. "Accumulating approach to the life-cycle pension model: practical advantages," Financial Theory and Practice, Institute of Public Finance, vol. 40(4), pages 413-436.
    2. repec:dau:papers:123456789/13624 is not listed on IDEAS
    3. 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.
    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. repec:pal:assmgt:v:19:y:2018:i:1:d:10.1057_s41260-017-0058-3 is not listed on IDEAS
    6. 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.
    7. 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.
    8. Xiaohong Huang & Ronald Mahieu, 2012. "Performance Persistence of Dutch Pension Funds," De Economist, Springer, vol. 160(1), pages 17-34, March.
    9. 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.
    10. repec:bla:jrinsu:v:83:y:2016:i:4:p:913-948 is not listed on IDEAS
    11. 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.
    12. Zhang, Linwan & Wu, Weixing & Wei, Ying & Pan, Rulu, 2015. "Stock holdings over the life cycle: Who hesitates to join the market?," Economic Systems, Elsevier, vol. 39(3), pages 423-438.
    13. repec:aia:aiaswp:wp99 is not listed on IDEAS

    More about this item

    Keywords

    Pension funds; strategic equity allocation; lifecycle saving and investing.;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:223. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet). General contact details of provider: http://edirc.repec.org/data/dnbgvnl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.