Does Regulation Matter? Riskiness and Procyclicality in Pension Asset Allocation

48 Pages Posted: 26 Dec 2014

See all articles by Ling-Ni Boon

Ling-Ni Boon

Tilburg University

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Sandra Rigot

University of Angers - Centre d'économie de l'Université de Paris Nord (CEPN)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2, 2014

Abstract

We investigate the influence of investment regulations on the riskiness and procyclicality of defined-benefit (DB) pension funds' asset allocations. We provide a global comparison of the regulatory framework for public, corporate and industry pension funds in the US, Canada and the Netherlands. Derived from panel data analysis of a unique set of close to 600 detailed funds’ asset allocations, our results highlight that regulatory factors are vitally important – more so than the funds’ individual and institutional characteristics, in shaping these asset allocations. In particular, risk-based capital requirements, balance sheet recognition of unfunded liabilities, lower liability discount rates, and shorter recovery periods lead pension funds to decrease their asset allocation to risky assets. Risk-based capital requirements reduce overall risky asset allocation by as much as 5%, mainly through alternatives. Our empirical results do not corroborate the theoretical predictions that risk-based capital requirements encourage procyclical investment.

Keywords: Solvency, pension funds, defined benefit, liability discount rate, valuation requirements, financial stability, regulation

JEL Classification: G11, G28, H55

Suggested Citation

Boon, Ling-Ni and Briere, Marie and Rigot, Sandra, Does Regulation Matter? Riskiness and Procyclicality in Pension Asset Allocation (December 2, 2014). Netspar Discussion Paper No. 12/2014-054. Available at SSRN: https://ssrn.com/abstract=2542577 or http://dx.doi.org/10.2139/ssrn.2542577

Ling-Ni Boon (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Marie Briere

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

Université Libre de Bruxelles ( email )

Brussels
Belgium

Sandra Rigot

University of Angers - Centre d'économie de l'Université de Paris Nord (CEPN) ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

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