Regulation and Pension Fund Risk-Taking
Résumé
We investigate the extent to which regulations governing investment, valuation and funding affect the riskiness of defined benefit pension funds' asset allocation. We compare the regulatory frameworks of public, corporate and industry pension funds in the United States, Canada and the Netherlands over 1992–2011. Derived from panel data analysis of a unique set of asset allocation details for close to 600 funds, our results highlight that regulatory factors are more economically significant than pension funds' characteristics in shaping asset allocation. In particular, risk-based capital requirements and mark-to-market valuation are both associated with a 7% lower risky asset exposure, especially equities, regardless of market conditions. By contrast, the exposure of a pension fund subject to a 100% funding requirement does not differ significantly from that of an unconstrained pension fund during normal times, but the constrained pension fund invests 4% less in risky assets during a financial crisis. In line with theoretical predictions, we find that risk-based capital requirements and minimum funding limits have different consequences for pension funds’ risk-taking.