Occupational Pension Funds Research Articles

When does an IORP operate cross-border?

The EU Directive on the activities and supervision of institutions for occupational retirement provision was originally envisaged as a mechanism to facilitate pension planning across the EU for pan-European employers. One of the main objectives of the Directive was to allow pension funds to benefit from the Internal Market principles of free movement of capital and free provision of services. As such, the Directive enables the management of occupational pension funds for companies established in one Member State to operate across the EU, allowing a pan-European company to have just one pension fund for all its subsidiaries all over Europe. It also put in place minimum prudential standards, which are designed to ensure that pension fund members and beneficiaries are properly protected. However, take-up of cross-border IORPs has fallen well below expectations. This article examines some of the different approaches adopted for identification and recognition of pan-European pension funds, and considers the impact of such approaches in encouraging (or otherwise) cross-border activity.

A Traffic Light Approach to Solvency Measurement of Swiss Occupational Pension Funds

In this paper, we combine a stochastic pension fund model with a traffic light approach to solvency measurement of occupational pension funds in Switzerland. Assuming normally distributed asset returns, a closed-form solution can be derived. Despite its simplicity, we believe the model comprises the essential risk sources needed in supervisory practice. Owing to its ease of calibration, it is well suited for a regulatory application in the fragmented Swiss market, keeping costs of solvency testing at a minimum. We calibrate and implement the model for a small sample of ten Swiss pension funds in order to illustrate its application and the derivation of traffic light signals. In addition, a sensitivity analysis is conducted to identify important drivers of the shortfall probabilities for the traffic light conditions. Although our analysis concentrates solely on Switzerland, the approach could also be applied to similar pension systems.

The Redistribution of Macroeconomic Risks by Dutch Institutions

We study the effects of macroeconomic shocks on different cohorts in the Dutch economy. From a calibrated stochastic model of macroeconomic risks, we derive typical shocks to productivity, demography and asset returns. The effects of these shocks are then simulated using an overlapping-generations model that contains a detailed specification of taxes, premiums, and benefits under Dutch law. We look at both the direct impact of shocks on agents wealth and at the redistribution and insurance that are carried out by the government and the pension system. While both these entities generally act to insure shocks across cohorts, our results show that the insurance role of the government is much larger than that of the occupational pension funds. We further find that there is little cross-correlation between different risks, except in the case of rare disasters.

International diversification and industry-related labor income risk

Do equity markets help diversifying away industry-related labor income risk? This paper reconsiders the hedging role of stock markets by focusing on international equity diversification, rather than domestic asset allocation, and on industry wage, rather than individual labor income. We compare industry-based portfolio holdings to the one that is optimal for an investor endowed with the average home-country labor income. Our results resurrect the role of equities in hedging wage risk by uncovering remarkable heterogeneity across industries within each investing country. Our analysis also delivers insights concerning the role of occupational pension funds in designing optimal portfolios for their members.

Real Pension Rights as a Control Mechanism for Pension Fund Solvency

This paper models policy responses to changes in solvency by Dutch occupational pension funds using a unique panel dataset containing the balance sheets of all registered pension funds in the Netherlands over a period of 15 years (1993–2007). The model describes how nominal pension rights are expanded, by e.g. indexation or backservice, or, on the contrary, how the current pension accumulation is skimmed, e.g. by setting the pension premium over its actuarially fair price to build buffers. Policy responses are explained by the funding ratio and other pension fund characteristics such as pension funds´ size and type, and participants’ ages. We find that pension rights are expanded in line with the funding ratio, but that the pension funds’ response function exhibits two sharp and significant behavioural breaks, close to the minimum funding ratio of 105% and the target ratio of around 125%. These levels also play a pivotal role in current supervisory regulation. We further find that large pension funds and grey funds are relatively generous to participants.

The EU internal market for occupational pensions: Making further progress

Pension funds will play an important role in meeting a number of key challenges common to European Union (EU) Member States: ageing, fiscal sustainability, cost efficient and adequate pensions, flexible labour markets and financial stability. These issues need a much greater coherent policy approach over the next few years. The EU internal market for occupational pension funds, based on the Institutions for Occupational Retirement Provision Directive, can contribute. This would allow employers and employees to reap the benefits of scale and scope economies, risk diversification, lower transaction costs, innovation and more product choice.

US Pension Funds' Labour Friendly Investments

Pension funds can be thought of as deferred workers wages. In many cases occupational pension funds have been established at the bargaining table through union representation. While all pension funds are established for the benefit of the pension plan beneficiaries, these deferred workers wages also have a significant impact on the communities in which they are invested. Labor friendly investments seek to direct the impacts of investment in a manner that creates strong and healthy communities and supports union or fair wage employment practices. Labor friendly pension funds in the US are generally either Taft-Hartley pension plans (jointly trusteed or union trusteed multi-employer plans) or public sector pension funds with a significant presence of union trustees. These funds often have a range of labor friendly policies and programs aimed at building strong and healthy communities. Such programs include responsible contractors' policies, responsible investors' policies, and specific allocations for targeted (or economically targeted) investments in their investment portfolio. These targeted investments often require union built construction (in the case of real estate or fixed income mortgage backed securities) or are aimed at job creation and retention (in the case of private equity investments). This paper explores the evolution of labor friendly US investments by pension funds in the period since the downturn of the financial markets in 2001. It argues that both pension funds and investment vehicles that bring intentional targeting to their investments are becoming increasingly sophisticated financial players. Labor friendly investments that focus on risk adjusted rates of return as the driver for investment are increasingly able to point to strong track records that encourage a wide range of pension fund investors to engage with these vehicles and practices.

‘A Silent Revolution’? The Role of Union Trustees in Occupational Pension Funds in the UK: Lessons from the 1970s and 1980s

‘A Silent Revolution’? The Role of Union Trustees in Occupational Pension Funds in the UK: Lessons from the 1970s and 1980s

International Diversification and Labor Income Risk

Members of an occupational pension plan face the same industry shocks, since membership is based on employment industry. An occupational pension fund might therefore design portfolio composition so as to hedge members' labour income shocks at the industry level. This paper quantifies differences in equilibrium equity portfolios across investors belonging to different industry-country pairs. We compare these industry-based portfolios to the one that would be optimal for an investor endowed with the average home-country labor income. Our analysis uncovers remarkable heterogeneity across industries in the three investing countries considered - US, Canada and Italy. These results point to a role of occupational pension funds in hedging labour income risk through international equity diversification.

'How Institutional' are Institutional Investors? The Institutional Life of US Occupational Pension Funds

Pension funds form an own domain within the general domain of finance as their institutional environments and arrangements of investment differ from other sub-domains. This working paper studies the institutional organization of the field of US occupational pension funds with new institutional theory including discussions on cultural economy approach to social studies of finance. US occupational pension fund investment actions are constituted and affected by various relevant institutions that are usually very diffused. The funds operate in heterogeneous regulative and normative environment in terms of form and sources, but the environment is somewhat homogeneous in substance. They face numerous constraints in their institutional environment, but most of these constraints simultaneously enable and give mandate and legitimization to various kinds of actions thus limiting the effectiveness of most constraints. The most restricting feature in the field level is the incentive to mimetic replication of conventional investment practice, which suggests that occupational pension fund investments are dependent on conventional models of investment whereas they are among the only actors that are capable of changing the very same models in the domain of finance. The main result of the paper in case of the organization field observed is that organization and governance methods can break conventional patterns and broaden the horizon of all pension fund actions enabled by their institutional environment. This may require, however, very strong institutional entrepreneurship in order to change investment behavior and especially corporate engagement practices in the occupational fund sector due to its cultural-cognitive restrictions.

Preliminary evidence from monitoring activities by pension funds and investment managers and attitudes towards shareholder activism by pension funds

There is widespread support for the proposition that pension funds can, should and do play an important role in monitoring management in the companies in which they invest. This article examines whether Irish occupational pension funds and investment managers use voting, engagement and intervention as monitoring strategies in relation to investee companies. Furthermore, the article examines whether there are significant differences in attitudes between the two groups across key themes relating to shareholder activism by occupational pension funds in order to identify whether potential agency problems may exist in relation to delegation and representation. The results of the research suggest low levels of monitoring by Irish occupational pension funds compared to investment managers which could be explained by delegation. Furthermore significant differences in perceptions were identified in relation to the perceived importance of “Anti-takeover measures”, “Improving information flow to shareholders” and “Remuneration” to pension funds, when compared against the rankings for the impact of pension funds to each of these particular areas.

Collective Pension Funds

Collective pension funds (CPFs) – occupational pension funds that cover the employees of more than one employer (enterprise) – have been operating in OECD countries for decades. Generally speaking, there are two models, i.e. closed pension funds, with membership restricted to a particular industry or group of industries, and open pension funds, open to all types of companies. The governance structure of such funds also operates in two ways – via an internal model (with trustees appointed by employers and employees) and an external model (with professional, commercial trustees). In this report, we first describe and analyse how CPFs are operated in selected OECD countries and non-OECD economies. Then, we review occupational pensions (or Enterprise Annuities – EA – in Chinese terminology) in general and CPFs in particular. Given the problems holding back the development of EA plans among small and medium-sized enterprises (SMEs) in China, and bearing in mind both China’s specific situations and international best practices, we propose a number of policy recommendations to promote the development of CPFs covering the SME sector. Our practical policy recommendations include: 1) industry funds with more open membership; 2) establishment of new purpose-built industry funds; 3) establishment of new regional EA administration centres acting as independent pension councils (trustees) for open pension funds; 4) in parallel to these policy initiatives in China, commercial trustees should be encouraged to establish CPFs targeting the SME sector.

Icelandic pension system

The pension system in Iceland is chiefly characterised by the operation of occupational pension funds. Although the minimum contribution rate is set by law, the system is not a pure defined contribution system as the minimum benefits are also stipulated in the pension law. The system is thus a hybrid between a defined benefit and a defined contribution system. The age distribution among the Icelandic population is relatively favourable, compared with continental Europe, and the number of retirees, compared with the working age population, is currently low and is estimated to remain so for the next few decades. The asset-building nature of the current pension system therefore makes it unlikely that a higher dependency ratio will result in a fund shortage or require higher taxes to finance retirement schemes in the future. This paper describes the Icelandic pension system in detail.

Pension Funds for Government Workers in OECD Countries

In the past few years, there has been a trend towards the harmonisation of pension policies for private and public sector workers, with the introduction of occupational complementary pension funds for civil servants. In many OECD countries these funds are among the largest in terms of assets and number of participants and constitute an important share of financial assets. Nonetheless, civil servants’ pension funds are exposed to particular risks related to the multiple roles played by the state which is, at same time, sponsor, regulator, supervisor, service provider, fiduciary agent and recipient of pension fund investments. Specific government-related agency problems can arise with respect to these funds which differ from those frequently analysed in the private sector. This paper analyses these risks in light of the experiences of Australia, Canada, Japan, the Netherlands and the United States and identifies good practices on how to avoid or mitigate them.

The Governance of Occupational Pension Funds and the Politico-Economic Implications: The Case of Austria

This paper analyses the efficacy of the governance structure of occupational pension funds (Pensionskassen – PKs) in Austria. Based on the results of the analysis, it further investigates the politico- economic implications for the political and legislative process regarding recent changes to the relevant Act (Pensionskassengesetz – PKG). The first section explains the exclusion of the beneficiaries’ interests from the institutional interest of the PKs’ association, i.e. the distribution of power, by the underlying governance structure of PKs. This section focuses on the structural conflict of interest PKs face, namely between their beneficiaries and their shareholders (almost exclusively large Austrian banks and insurance companies). The institutional interests of PKs are determined by the governance structure at the micro and meso levels and the interests of the stakeholders, in particular those of the shareholders, while the governance structure is treated as given. The second section focuses on the empirical investigation of the politico-economic impact of the findings in the first section. It analyses the role of the PKs and in particular the PK association (Fachverband der Pensionskassen) in the political process in a case study. It argues that the repercussions of the governance structure at the micro and meso levels on the political level can result in a vicious circle for beneficiaries and that the political risks associated with long-term guarantees for beneficiaries of occupational pension funds are substantial and aggravated by the governance structure at the micro and meso level. It employs an actor- centred institutionalism.

Pension fund management: a trade union commitment to greater corporate social responsibility

Corporate social responsibility (CSR), in association with sustainable development, has become a live issue over the past few years. Should companies be allowed to do whatever they like in the name of competitiveness, even at the risk of compromising the future of the planet? What means does the trade union movement currently have at its disposal to influence corporate conduct in the direction of sustainable development and social responsibility? Over and above traditional trade union activities, the unions have available to them a tool, namely the funds which they manage – or jointly manage – in connection with occupational pension or employee savings schemes. By having their say in the investment strategies of these funds, trade unions can make decisions that affect corporate conduct. This is what is now known as socially responsible investment (SRI). This article sets out to explore the issue, demonstrating how we have moved on from what was initially a moral, ethical approach, geared mainly towards ‘exclusion', to a more incentive-based approach seeking to encourage companies whose conduct is more ‘responsible'. In other words, we shall show that occupational pension funds can in fact become a new weapon in the trade union armoury.

Do occupational pension funds monitor companies in which they hold large stakes?

In this paper we analyze the monitoring role of occupational pension funds in the UK. We argue that because of their objectives, structure and overall share holding, occupational pension funds are likely to have more incentives to monitor companies in which they hold large stakes than other financial institutions. By comparing companies in which these funds hold large stakes with a control group of companies listed on the London Stock Exchange, we show that occupational pension funds hold large stakes over a long-time period mainly in small companies. However, the value added by these funds is negligible and their holdings do not lead companies to comply with the Code of Best Practice or outperform their industry counterparts. Overall, our results suggest that occupational pension funds are not effective monitors.

South Africa: The occupational pension scene

This paper describes briefly the pensions legislation that governs occupational pension and provident funds in South Africa. Member-elected trustees and the establishment of the Pension Funds Adjudicator's office are examples of recent legislation. The South Africa tax relieves (in respect of pension and provident funds) are under siege and there are moves to rationalise the different retirement regimes.

On Kaldor and pensions

In this paper the ‘Kaldorian Saving Function’ on differential propensities between household and corporate income is restated and extended to account for saving through occupational pension funds. The extended hypothesis is then tested and compared to Kaldor's own, using recent UK data. Solid support is found for the Kaldorian hypothesis and the extended ‘Corporate Capitalism Saving Function’. Our findings cast doubt on the Life Cycle and related hypotheses on savings. They also raise interesting questions about neoclassical and post-Keynesian theories of growth and distribution.

Prospects for Occupational Pension Funds

The future prospects of pension funds in the private sector are linked inextricably with those of their sponsoring organisation. In the face of substantial economic and financial difficulties facing funds and the employers, with pressure from the trade union movement for greater accountability also mounting, alternative schemes such as Pay‐as‐you‐go (PAYG), are being more thoroughly considered. This system, widely used in the public sector, removes the necessity for complex administrative set‐ups and copes more effectively with the supplementation of pensions to allow for price inflation impact. However, it poses a significant financial burden on the employing organisation. “Book reserve” or “self‐investment” schemes allow members a motivating stake in the employing enterprise and allow the company to keep control of its cash and ensure worthwhile pensions.