Pension fund's illiquid assets allocation under liquidity and capital requirements

Abstract

Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.

Can the commodity futures be used as effective diversifiers for pension funds investment portfolios? A literature review

“…According to Broeders et al, (2021) pension funds tend to invest in low-liquidity investment options such as real estate, hedge funds, infrastructure, mortgages and private equity.…”

Economic principles in pension design

“…All pension funds are obliged to report this information to DNB. This dataset has been used before, by e.g., Bikker et al (2012), De Haan (2018, Boermans and Galema (2019), and Broeders et al (2021b). We use a balanced panel of 160 occupational pension funds that reflects almost the entire population of Defined Benefit (DB) pension funds in the Netherlands from 2016 to 2021.…”

Micro studies of macroprudential policies using loan-level data

“…Mortgages are attractive to pension funds because of the potential for diversification (see Trappenburg, 2015) and hedging. Dutch pension funds have historically favored other types of investments (Broeders et. al, 2021), but have significantly increased their mortgage investments since 2014 (Figure 2.3).…”

“…Recent studies on illiquid assets are also worth mentioning. Broeders et al (2021) show that liquidity and capital requirements are important when deciding the share of illiquid assets. Jansen and Tuijp (2021) show that investment costs, supervisory requirements, and portfolio management are significant factors too.…”