Pension funds should always take into account human capital, or the career perspective of their members, when determining how much risk they can take with their investments. But they too often fail to do this, according to experts.

The degree of certainty of future labour income affects the risk capacity of pension participants; the more predictable and stable their income, the more risk they can shoulder, argued Thomas Pistorius, a risk manager at Pensioenfonds Vervoer, the €37bn fund for the Dutch transport sector, in a recent article in the VBA Journaal, a Dutch-language journal for professional investors.

Human capital is a neglected factor in the pensions debate, Pistorius told IPE. “The degree of predictability of future labour income impacts the asset allocation of a pension fund. In that sense, human capital is comparable to an investment,” he said.

The human capital of, for example, a teacher, who runs a very low risk of losing their job and whose income is highly predictable, can be compared to a safe bond investment.

At the same time, the human capital of an entrepreneur is more akin to an equity investment as it can fluctuate strongly and is hard to predict.

This difference in predictability means the teacher can theoretically invest a larger portion of their assets in risky assets than the entrepreneur.

“This is why pension funds should always consider to explicitly integrate human capital in their investment beliefs,” said Pistorius.

Roel Mehlkopf, a risk management consultant at Cardano, also noted that pension funds often underestimate the importance of human capital. “I haven’t often come across pension funds that explicitly take human capital into account in their investment policies. After all, ALM studies tend to focus on financial risks,” he said.


Mehlkopf only knows one fund to explicitly take human capital into consideration. This is the €12.2bn Pensioenfonds Huisartsen, the fund for Dutch general practitioners. It used the concept to determine the risk profile of its new defined contribution (DC) arrangement which was introduced this year.

Pieter De Graaf, Pensioenfondsen Huisartsen

Pieter De Graaf, Pensioenfonds Huisartsen

“In the lifecycle we use in our new arrangement, we have taken into account the investment horizon as well as the human capital of our members,” said Pieter de Graaf, the fund’s chief investment officer.

He added: “Because of the large amount of certainty we derive from the human capital of our members and our diversified investment portfolio, we only start reducing investment risk 10 years before pension age. When you are a GP, it’s quite certain you can keep your job. Besides, incomes of GPs are relatively stable and predictable throughout their career.”

In a lifecycle where future earnings are not as predictable – such as in the case of the aforementioned entrepreneur – de-risking already starts at 35 years of age, according to Mehlkopf.

“This would be the case with a profession that’s very susceptible to the macroeconomic environment. In the case of risk-free professions, you would only start dialling down risk at around 51 years of age, or even later if you have a diversified-return portfolio.”


On top of this, a GP’s position on the labour market is not impacted by the trade cycle; a deteriorating economic situation does not materially influence the career prospects of a GP. As a result, the human capital of GPs has a very low correlation with financial markets.

The human capital of members of civil service scheme ABP also looks relatively stable, even though civil servants’ incomes were frozen for several years following the financial crisis.

ABP takes the relative stability of its members’ incomes into account in its investment policy, a spokesperson for the fund told IPE: “ABP members have a relatively high degree of certainty when it comes to their future earnings. As a result, we can take a relatively high amount of risk in our investment policy.”


On the other hand, there are also funds with a population that have much lower visibility when it comes to their future incomes – for example, because these funds cater for sectors that are sensitive to the macroeconomic environment.

In many cases, these sectors have been hit hard by the COVID crisis too, with the travel and hospitality sectors being prime examples.

The number of active participants in these sectors has come down significantly, while the amount of outstanding, uncollectible pension contributions has grown, Dutch trade publication Pensioen Pro reported earlier.

Pensioenfonds Horeca & Catering, the €15bn fund for the Dutch hospitality industry, said it has no opinion on whether or not the human capital of its members informs a fund’s risk capacity.

“Currently, we don’t take the concept of human capital into account in our investment policy,” a spokesperson said.

The retail sector is another volatile sector with uncertain prospects which have been exacerbated by the COVID crisis. It is not clear to what extent Pensioenfonds Detailhandel, the €31bn fund for the retail sector in the Netherlands, takes this into account in its investment policy. The fund declined to answer questions on the matter.

Pensioenfonds Vervoer is also hesitant to comment. “It is still too early to communicate the opinion of the pension fund on this issue. The topic of human capital will be discussed by the board at a later stage,” said the fund’s director Willem Brugman.

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