What Determines the Asset Allocation of Defined Benefit Pension Funds?

26 Pages Posted: 30 Nov 2020 Last revised: 25 Feb 2021

See all articles by Zucheng Zhao

Zucheng Zhao

University of Reading

Charles Sutcliffe

University of Reading - ICMA Centre

Date Written: February 21, 2021


The asset allocation decision is one of the most important decisions made by defined benefit pension schemes, with a major effect on the scheme contribution rate, funding ratio and financial position of the sponsoring company. We investigate the determinants of the equity allocation of UK pension funds using a panel of 1,304 observations on 125 companies that were members of the FTSE 100 over the 2003-2019 period. We find that seven variables have a significant effect on the allocation between equities and bonds – maturity (as measured by the effective duration of scheme liabilities), default risk, leverage of the sponsor, size of the sponsor (or the scheme), whether the scheme is closed to future contributions, whether the scheme has significant overseas liabilities, and a time trend. Our sensitivity analysis finds that the biggest effects on the asset allocation come from scheme maturity, the scheme’s funding ratio and a time trend.

Keywords: Defined Benefit Pension Schemes; Pension Fund Asset Allocation; Pension Scheme Maturity; Pension Liabilities; Effective Duration; Risk Management

JEL Classification: G23; G32; J32

Suggested Citation

Zhao, Zucheng and Sutcliffe, Charles M., What Determines the Asset Allocation of Defined Benefit Pension Funds? (February 21, 2021). Available at SSRN: https://ssrn.com/abstract=3700340 or http://dx.doi.org/10.2139/ssrn.3700340

Zucheng Zhao

University of Reading ( email )

ICMA Centre
University of Reading
Reading, RG6 6DL
United Kingdom

Charles M. Sutcliffe (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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