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

20 Pages Posted: 20 Nov 2009

See all articles by Dirk Broeders

Dirk Broeders

De Nederlandsche Bank; Maastricht University

David Hollanders

Tilburg University - Tilburg University School of Economics and Management

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Jacob Antoon Bikker

De Nederlandsche Bank; Utrecht University - School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November, 18 2009

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

JEL Classification: D91, G11, G23, H55, J14

Suggested Citation

Broeders, Dirk and Hollanders, David and Ponds, Eduard H.M. and Bikker, Jacob Antoon, Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model (November, 18 2009). Netspar Discussion Paper No. 09/2009-032. Available at SSRN: https://ssrn.com/abstract=1508377 or http://dx.doi.org/10.2139/ssrn.1508377

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/onderzoek-2/onderzoekers/overzicht-persoonlijke-paginas/dnb257487.jsp

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

HOME PAGE: http://https://www.maastrichtuniversity.nl/about-um/faculties/school-business-and-economics

David Hollanders

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Eduard H.M. Ponds

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

Jacob Antoon Bikker (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

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