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Asset allocation in Finnish pension funds

Published online by Cambridge University Press:  08 February 2006

NOORA ALESTALO
Affiliation:
Mandatum, Unioninkatu 22, FI-00131 Helsinki, Finland (email: [email protected])
VESA PUTTONEN
Affiliation:
Helsinki School of Economics, Runeberginkatu 22-24 FI-00100 Helsinki, Finland (email: [email protected])

Abstract

This paper empirically examines the strategic asset allocation and the asset/liability issues in the Finnish defined benefit pension funds. The results indicate that there is a relationship between the liability structure and the asset allocation. While pension funds with younger participants have more equity exposure, more mature pension funds have more fixed income investments.

Wide dispersion in asset allocations is also found between the funds. One fund holds its entire portfolio in fixed income securities, whereas other funds have none or only few fixed income holdings. Equity investments also vary dramatically, ranging from 0% to over 70% of the asset allocation. The same applies to investments in a sponsor, real estate investment, and money market investments. A portion of these different asset allocations is explained by the liability structure, but another part remains unexplained. The other variables affecting strategic asset allocation of a pension fund are not obvious, but they could include factors such as regulatory environment, historical reasons, mean-variance optimization instead of ALM, sponsor's own preferences or pension fund's irrationality. Analyzing these factors would be a fruitful topic for further research. Additionally, international comparisons would be a fruitful topic for further investigation.

Type
Research Article
Copyright
2006 Cambridge University Press

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Footnotes

The unique data set is collected from the Finnish Centre for Pensions (ETK) and from the Insurance Supervisory Authority (ISA), and the authors are grateful for both institutions for providing the access to the data. We would like to thank Eric Deighton, Seppo Ikäheimo, Markku Kaustia, Matti Keloharju, Samuli Knupfer, Tuomo Vuolteenaho, three anonymous reviewers and the Editor Steven Haberman for helpful comments and suggestions. In addition, the co-operation with Citigroup is gratefully acknowledged.