Pension Funds' Asset Allocation and Participant Age

A Test of the Life-Cycle Model

J.A. Bikker, D.W.G.A. Broeders, D.A. Hollanders, E.H.M. Ponds

Research output: Book/ReportReportProfessional

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.
Original languageEnglish
Place of PublicationTilburg
PublisherNETSPAR
Number of pages20
Volume09/2009-032
Publication statusPublished - 2009

Publication series

NameNetspar Discussion Paper
Volume09/2009-032

Fingerprint

Life-cycle model
Asset allocation
Pension funds
Equity
Investment behavior
Wealth
Employees
Pension plans
Employers
Young workers
Human capital
Funding
Older workers
Pensions
Factors

Keywords

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

Cite this

Bikker, J. A., Broeders, D. W. G. A., Hollanders, D. A., & Ponds, E. H. M. (2009). Pension Funds' Asset Allocation and Participant Age: A Test of the Life-Cycle Model. (Netspar Discussion Paper; Vol. 09/2009-032). Tilburg: NETSPAR.
Bikker, J.A. ; Broeders, D.W.G.A. ; Hollanders, D.A. ; Ponds, E.H.M. / Pension Funds' Asset Allocation and Participant Age : A Test of the Life-Cycle Model. Tilburg : NETSPAR, 2009. 20 p. (Netspar Discussion Paper).
@book{1e37df8f542142e9a7878eec634d9ac2,
title = "Pension Funds' Asset Allocation and Participant Age: A Test of the Life-Cycle Model",
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.",
keywords = "Pension funds, strategic equity allocation, lifecycle saving and investing.",
author = "J.A. Bikker and D.W.G.A. Broeders and D.A. Hollanders and E.H.M. Ponds",
note = "Pagination: 20",
year = "2009",
language = "English",
volume = "09/2009-032",
series = "Netspar Discussion Paper",
publisher = "NETSPAR",

}

Bikker, JA, Broeders, DWGA, Hollanders, DA & Ponds, EHM 2009, Pension Funds' Asset Allocation and Participant Age: A Test of the Life-Cycle Model. Netspar Discussion Paper, vol. 09/2009-032, vol. 09/2009-032, NETSPAR, Tilburg.

Pension Funds' Asset Allocation and Participant Age : A Test of the Life-Cycle Model. / Bikker, J.A.; Broeders, D.W.G.A.; Hollanders, D.A.; Ponds, E.H.M.

Tilburg : NETSPAR, 2009. 20 p. (Netspar Discussion Paper; Vol. 09/2009-032).

Research output: Book/ReportReportProfessional

TY - BOOK

T1 - Pension Funds' Asset Allocation and Participant Age

T2 - A Test of the Life-Cycle Model

AU - Bikker, J.A.

AU - Broeders, D.W.G.A.

AU - Hollanders, D.A.

AU - Ponds, E.H.M.

N1 - Pagination: 20

PY - 2009

Y1 - 2009

N2 - 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.

AB - 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.

KW - Pension funds

KW - strategic equity allocation

KW - lifecycle saving and investing.

M3 - Report

VL - 09/2009-032

T3 - Netspar Discussion Paper

BT - Pension Funds' Asset Allocation and Participant Age

PB - NETSPAR

CY - Tilburg

ER -

Bikker JA, Broeders DWGA, Hollanders DA, Ponds EHM. Pension Funds' Asset Allocation and Participant Age: A Test of the Life-Cycle Model. Tilburg: NETSPAR, 2009. 20 p. (Netspar Discussion Paper).