Pension Fund Investment Research Articles

Performance and Governance of Swiss Pension Funds

We investigate the relationship of pension fund governance and investment performance. For this purpose, we develop the Swiss Pensoin Fund Governance Index (SPGI) which is a standard metric for the governance quality of Swiss pension funds. The empirical analysis is based on a sample of 96 pension funds with total assets of more than CHF 190 billion. We find evidence for governance issues in the area organization and target setting. Our results support the widespread hypothesis of a positive relationship between pension fund governance and investment performance.

Pension fund investment law

Pension fund investment law

Tax treatment of cross-border pensions under the OECD Model and EU law

This article summarizes the proceedings of the seminar on cross-border pensions at the 2008 IFA Congress in Brussels. The panel considered four topics: cross-border pension contributions, portability of pension rights, taxation of the pension fund's investment income, and allocation of taxing rights. The article discusses these topics in light of the OECD Model and in light of EU law. The discussion of allocation of taxing rights addresses, among other things, the question of determining the source of a pension for treaty purposes.

Pension Fund Sophistication and Investment Policy

This paper assesses the sophistication of pension funds’ investment policies using data on 748 Dutch pension funds during the 1999–2006 period. We develop three indicators of sophistication: gross rounding of investment choices, investments in alternative sophisticated asset classes and ‘home bias’. We find that pension funds’ strategic portfolio choices are often based on coarse and possibly less sophisticated approaches. Most pension funds, particularly the medium-sized and smaller ones, round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative asset classes besides equities and bonds, resulting in limited asset diversification. Third, medium-sized and smaller pension funds favor regional investments and as such not fully employ the opportunities of international diversification. Finally, we show that pension funds using less sophisticated asset allocation rules tend to opt for investment strategies with a lower risk-return profile.

Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model

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.

Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model

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.

The Rise of Pension Fund Capitalism in Europe: An Unseen Revolution?

The pension funds have become America's new ‘tycoons’ – surely the most unlikely masters any society ever had. They have attained this position without any struggle, any crisis, any major ‘problems...

Performance and governance of Swiss pension funds

AbstractWe investigate the relationship between pension fund governance and investment performance. For this purpose, we develop the Swiss Pension Fund Governance Index (SPGI) which is a standard metric for the governance quality of Swiss pension funds. The empirical analysis is based on a sample of 96 pension funds with total assets of more than CHF 190 billion. We find evidence for governance issues in the area organization and target setting. Our results support the widespread hypothesis of a positive relationship between pension fund governance and investment performance.

Financial Markets Trend: Ageing and Pension System Reform

Ageing have prompted important changes in the structure of pension system with substantial differences across the most developed countries. Given that ageing populations are driving a growing need for private form of saving for retirement, the pension fund industry is like to exert an increasing influence in the financial markets. Much of the additional retirement related flows to capital markets will be intermediated by pension funds although their importance varies considerably across country. This work reviews recent change in the pension funds industry (updated at 2006) originated from pension system reform across countries as well as risk management practices, such as ALM; the paper also focus the potential implication of pension funds investments strategies on financial markets identifying the main gaps in the availability of financial instruments needed for pension funds.

A Relational Account of the Valuation and Management of UK Defined Benefit Pension Funds (1948-2008).

paper provides an account of the rise and decline of UK defined benefit pension provision. A relational model of economic agency is introduced in which the agent; the pension fund manager (PFM), uses ambiguity to mediate between shareholders and members; two principals with conflicting objectives. The evolution of financial accounting both requires feedback to be provided by professional working within client firms, leading to the emergence of the PFM's role, and introduces performance measures which constrain the PFM. Four eras in pension fund financial accounting are related to four eras in the setting of pension fund investment policy.

Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans

Firms financed with debt face conflicting incentives with respect to the management of cash flow risks. Risk reduction can benefit liquidity constrained firms, but increased risk taking can increase the value of shareholders’ equity through asset substitution when firms are close to default. In this paper I examine these conflicting motivations in a setting where risk shifting incentives should be particularly strong: the investment of defined benefit pension plans sponsored by U.S. companies. Empirically, firms with poorly funded pension plans allocate a greater share of pension fund assets to safer securities such as government debt and cash, whereas well-funded plans invest more heavily in volatile asset classes such as equity. Among large public firms, those with better credit ratings allocate greater shares of pension fund assets to equity and smaller shares to government debt and cash. These relations hold both in the crosssection and within firms and plans over time. The higher the probability of bankruptcy, the safer the observed pension fund asset allocation. Furthermore, the realized investment return volatility of plans that eventually terminate in financial distress is no greater than that of plans that do not terminate. I conclude that the incentive to limit the cash flow risk from pensions plays a considerably larger role than risk shifting in explaining pension fund investment policy among U.S. firms.

Building the case for direct infrastructure

Falling equity markets and a re-rating of credit markets in an inflationary environment are prompting many pension fund managers to reassess their strategic asset allocations. Moreover, a tactical overweight to alternatives may support investment performance at a time of increased uncertainty in listed markets. For some, investment allocation decisions made now may prove to be the most significant for risk-adjusted returns since those made following the 2000 equity market downturn. What role can unlisted infrastructure investments play within a pension fund investment portfolio and why does it make particular sense to include them now?

Governance and investment of sovereign and public pension reserve funds in selected OECD countries

Many countries around the world are partly prefunding their otherwise pay-as-you-go (PAYG) financed social security systems by establishing or further developing existing public pension reserve funds (PPRFs). Most OECD countries have put in place internal and external governance mechanisms and investment controls to ensure the sound management of these funds and better isolate them from undue political influence. These structures and mechanisms are in line with OECD standards of good pension fund governance and investment management. In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds. However, some specific details of the funds’ governance and investment management could be improved in a few countries, such as enhancing the expertise in the funds’ governing boards and constraining discretionary interventions by government. Such reforms will ultimately raise the long-term investment performance of the funds and the solvency of social security systems.

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.

Governance and Investment of Public Pension Reserve Funds in Selected OECD Countries

Many countries around the world are partly prefunding their otherwise pay-as-you-go (PAYG) financed social security systems by establishing or further developing existing public pension reserve funds (PPRFs). Most OECD countries have put in place internal and external governance mechanisms and investment controls to ensure the sound management of these funds and better isolate them from undue political influence. These structures and mechanisms are in line with OECD standards of good pension fund governance and investment management. In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds. However, some specific details of the funds’ governance and investment management could be improved in a few countries, such as enhancing the expertise in the funds’ governing boards and constraining discretionary interventions by government. Such reforms will ultimately raise the long-term investment performance of the funds and the solvency of social security systems. La gouvernance et les investissements des caisses de reserve des regimes publics de retraite dans quelques pays de l'OCDE De nombreux pays dans le monde procedent a une capitalisation prealable partielle de leurs regimes de protection sociale qui reposent par ailleurs sur la repartition. A cet effet, ils dotent leurs regimes publics de retraite de caisses de reserve ou developpent les caisses existantes. La plupart des pays de l’OCDE ont mis en place des mecanismes internes et externes de gouvernance et de controle des investissements pour veiller a la saine gestion de ces caisses et a mieux les isoler d’influences politiques indues. Ces structures et mecanismes sont conformes aux normes de bonne gouvernance des fonds de pension et de gestion des investissements. En particulier, ces caisses respectent de facon generale les imperatifs de responsabilite, de qualification et de transparence. Cela etant, dans quelques pays, on pourrait ameliorer des specificites de la gouvernance et de la gestion des investissements, notamment en renforcant les instances dirigeantes de ces caisses et en limitant les interventions discretionnaires des pouvoirs publics. Ces reformes permettront en derniere analyse d’ameliorer les performances de long terme des investissements de ces caisses et la solvabilite des regimes de protection sociale.

'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.

Australian pension funds and tobacco investments: promoting ill health and out-of-step with their members

There has been no systematic examination of issues surrounding pension funds and their tobacco shareholdings. This paper describes two studies designed to document the tobacco investment policies and practices of pension funds, and to assess community and fund member attitudes to pension fund shareholdings in the tobacco industry. Chief executives (n = 282) of Australian pension funds were mailed questionnaires. Of 241 eligible funds, 107 (44.4%) returned questionnaires, representing about 61% of total Australian primary superannuation accounts. Twelve percent indicated that they did not currently hold tobacco investments, 30% held tobacco shares and 58% did not know or failed to answer. Overall, 6% of respondents said that they held no tobacco investments and would not consider future investments; 2% had formal policies precluding tobacco investments. Funds with 10,000 or more members were more likely (p = 0.0006) to report tobacco investments. External fund manager advice was the most important factor influencing the funds' position. In the second study, a one-third random sub-sample of consenting subjects from 12,000 households randomly selected from the New South Wales Electronic White Pages completed phone interviews. From 7141 eligible households, 3503 (49.1%) subjects consented. One-third (n = 1158) were asked the pension fund questions. Over three-quarters (77.4%) of all respondents disagreed that pension fund investments in tobacco were ethical. Approximately two-thirds (63.6%) of fund members (n = 852) agreed that their funds should not make tobacco investments. There were three statistically significant predictors of opposition to such investments: being female, more highly educated and non-smoking status. Nearly all pension funds treat tobacco investments like any other investment. In contrast, most of the public including fund members are strongly opposed to such investments. Suggestions for public health advocacy strategies to reduce the negative health promotion effects of pension funds in this area are outlined.

Pension investments in employer stock

SUMMARYThis study examines the consequences of a pension fund investing in the stock of the sponsoring firm. Using a merger of data on pension asset holdings from IRS Form 5500 filings and financial data on the company's stock from CRSP, two broad questions are addressed: first, what factors influence the extent of a pension fund's investments in the employer's stock? Second, when a pension invests in the employer's stock, how much is lost as a result of poor diversification? The empirical results suggest that investments in employer stock are responsive to non-diversification costs, tax consequences, and the employee's ability to absorb risk. There is also evidence that employers and employees weight these factors differentially in their decision of how much employer stock to include in the pension. Using actual return data on pension plans, we also find that concentrated investments in employer stock substantially reduce risk-adjusted return performance. However, modest holdings of employer stock have negligible effects on pension performance.

The Optimal Strategy to Research Pension Funds in China Based on the Loss Function

Based on the theory of actuarial present value, a pension fund investment goal can be formulated as an objective function. The mean-variance model is extended by defining the objective loss function. Furthermore, using the theory of stochastic optimal control, an optimal investment model is established under the minimum expectation of loss function. In the light of the Hamilton-Jacobi-Bellman (HJB) equation, the analytic solution of the optimal investment strategy problem is derived.

The Case against Stock in Public Pension Funds

The case against equity investment by U.S. corporate pension funds has been well documented for a quarter century. The public sector has ignored or dismissed that case because of differences between taxation and accounting between the private and public sectors, the differing interests of shareholders and taxpayers, and the presumption that public plans last forever. Despite these differences, shifting public pension fund investments from equities to bonds adds value for local taxpayers. It also minimizes the risks of intergenerational taxpayer conflicts, undercharges to employees’ compensation packages for the value of the pensions, employee claims on pension surplus, and higher governmental borrowing costs.