Pension Fund Sophistication and Investment Policy

24 Pages Posted: 19 Nov 2009

See all articles by Jan de Dreu

Jan de Dreu

Royal Bank of Scotland (RBS) - Global Banking & Markets

Jacob Antoon Bikker

De Nederlandsche Bank; Utrecht University - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2009

Abstract

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.

Keywords: Pension funds, investment policy, portfolio choice, gross rounding, heaping, diversification, home bias, alternative investments, behavioral finance

JEL Classification: G11, G23

Suggested Citation

Dreu, Jan de and Bikker, Jacob Antoon, Pension Fund Sophistication and Investment Policy (May 1, 2009). Netspar Discussion Paper No. 05/2009-016, Available at SSRN: https://ssrn.com/abstract=1508389 or http://dx.doi.org/10.2139/ssrn.1508389

Jan de Dreu (Contact Author)

Royal Bank of Scotland (RBS) - Global Banking & Markets ( email )

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Jacob Antoon Bikker

De Nederlandsche Bank ( email )

PO Box 98
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Amsterdam, 1000 AB
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Utrecht University - School of Economics ( email )

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