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Pension Fund Asset Allocation In Low Interest Rate Environment

The financial crisis of 2008 has led to a substantial and lasting change in investment opportunities. Both long-term and short-term interest rates have now been at historic lows in many countries for more than five years, presenting new challenges for pension funds. One result has been a substantial increase in the present value of liabilities for Defined Benefit (DB) pension funds. At the same time, fixed-income has become a less attractive asset class due to lower expected returns, which has implications for Defined Contribution (DC) as well as DB funds.

11. mai 2016

We analyze changes in portfolios of pension funds since the start of current low interest rate environment. We find that they have on average decreased the allocation to equity and increased the allocation to fixed income, which is inconsistent with the literature on strategic asset allocation. Next, more generally, we empirically investigate the relationship between variables that predict asset returns and portfolio allocation in levels as well as changes. We find that dividend-price ratio shows the strongest relationship among other variables. However, we find a negative relationship as opposed to a positive one predicted by the literature. Overall, the results suggest that pension funds are unable to incorporate predictive information in their strategic asset allocation, but they take active decisions by under or over-weighting their portfolio relative to the stated strategic portfolio to benefit from time-varying investment opportunities.