Boards of especially corporate pension funds that have a disproportionate number of older directors invest more conservatively than boards that also include younger people, according to research conducted by Maastricht University.

The research included 437 pension funds with defined benefit arrangements over the period 2007-2016, three quarters of which were corporate pension schemes. On average these schemes invested 30% of their assets in equities, 60% in fixed income and 10% in alternatives.

The researchers investigated whether the average age of trustees impacted on the percentage of equities in their total investment mix while correcting for factors such as the average age of a scheme’s members and the coverage ratio of a fund.

The lower the coverage ratio, the less risk a pension fund tends to take. The average age of the board members included in the research was 53 years old. Just 9% of the board members were aged below 40 while 19% was less than 46 years old.

The research concluded that the older the composition of a fund’s board, the less they invested in equities. The effect is most obvious in corporate pension schemes, while it’s hardly present in sector funds.

“The reason for this could be that trustees of a corporate pension scheme often are a member of the fund themselves so they have a personal interest in pushing their own interests in the investment policy of the fund,” said professor Rob Bauer, who was involved in the study.

Bauer added: “The effect is strongest for funds who have at least one person below 40 in their board. These funds invest on average more than 3 percentage points more in equities that other funds.”

Risk aversion

Bauer noted that the average age of trustees tended to be significantly higher than 45 years old, which is the average age of active members. “As a consequence, Dutch corporate pension funds often invest less in equities than could be expected on the basis of their age make-up,” he said.

According to Bauer, the average allocation to equities of a Dutch corporate pension fund is about 7 percentage points lower than a standard (defined contribution) lifecycle allocation.

This means “there is a danger that a fund’s investment policy does not fit the risk appetite of participants. This risk appetite is being measured and registered but is apparently not always being followed,” he continued.

“There is a danger that a fund’s investment policy does not fit the risk appetite of participants”

Rob Bauer, Maastricht University

According to Bauer, many trustees do not realise their age may impact the way they think about the strategic asset mix of a pension fund.

Bauer also noted that a scheme invests more in equities once the relative number of board members representing companies increases. “This could be motivated by a pursuit of a free lunch by the sponsor,” he said.

“If an increase in risk works out well, the coverage ratio goes up, so pension contributions can be lowered. If it goes wrong and the coverage ratio declines, workers and pensioners pay the price in the form of pension cuts.”

The study results also suggested pension funds that have more than one woman in their boards take less risk than fully male boards. “To statistically validate this conclusion, however, we would have to look at the period 2017-2020 too,” Bauer said.

Between 2007 and 2015, 40% of funds only had male trustees on their boards. On average, 11% of trustees were female. The share of women in pension fund boards has increased over the past few years.

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