Diversifying investment risks could increase the chances of pension funds all having to cut benefits at the same time, Dutch economists have argued.

Writing for the journal Economische Sociale Berichten (ESB), Dirk Broeders and Rob Bauer – economics professors at Maastricht University – warned that pension funds hiring the same actuarial advisers and asset managers often made the same strategic investment choices.

Their research showed that this herd behaviour in particular applied to alternative asset classes such as commodities, private equity, hedge funds and real estate.

“With alternatives, pension funds tend to focus on what other schemes do, as these investments are often more complex, have a higher risk profile and are less liquid than equities and bonds,” the economists said.

Although such diversification through adding alternative investments was a proper way of risk management for individual schemes, the economists said this did not necessarily lead to a more stable pensions system at a macro level, according to Broeders and Bauer.

If pension funds followed each others’ strategy, they acted as a more or less equal group, the economists argued, with funding ratios tending to move in the same direction and increasing the risk of simultaneous funding shortfalls. They referred to a potential systemic risk.

“The consequence may be that many schemes have less potential for inflation compensation and even run the risk of [pension] rights discounts at the same time,” they said.

Broeders, who is also a policy officer at regulator De Nederlandsche Bank, said such an effect was “undesirable”.

“We don’t want all banks running into problems at the same time,” the researchers said.

From a macro-economic perspective, the Dutch pensions system would be more stable if pension funds diversified in different ways, Broeders said. However, how this should be done required additional research.

Last year, Broeders, along with other researchers, found that pension funds hiring the same actuarial adviser tended to increase their risk profile in 2015, using a one-off option offered by the Netherlands’ new financial assessment framework.

Their survey discovered the same tendency at pension funds using the same asset manager, albeit to a lesser extent.

In Broeders’ opinion, the fact that pension funds shared information through the same actuaries and asset managers was not negative.

“It is absolutely normal and even inevitable, as pension funds face similar decisions,” he said. “Also, there are fewer advisers and asset managers than pension schemes.”

The Meuse in Maastricht

A bridge over the river Meuse in Maastricht