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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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    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/309582/09_25.pdf
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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. 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.
    3. 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.
    4. 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.
    5. Xiaohong Huang & Ronald Mahieu, 2012. "Performance Persistence of Dutch Pension Funds," De Economist, Springer, vol. 160(1), pages 17-34, March.
    6. 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.
    7. repec:aia:aiaswp:wp99 is not listed on IDEAS

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    Keywords

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

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