NETHERLANDS - The strategic portfolio choice of small and medium-sized pension funds is often based on coarse and less sophisticated approaches than larger pension funds, researchers have claimed.
Schemes with less sophisticated asset allocation rules also tend to opt for investment strategies with a lower risk-return profile, according to Jan de Dreu and Jacob Bikker, in a report commissioned by pensions regulator De Nederlandsche Bank.
De Dreu and Bikker looked at the data of 748 Dutch pension funds in the period between 1999 to 2006 and found most pension funds - small and medium-sized funds in particular - round strategic asset allocations to the nearest multiple of 5%, similar to age-heaping applied in demographic and historical studies, researchers observed.
The authors also found that many pension funds invest little, if at all, in alternative asset classes so asset allocation is placed solely in equity and fixed income, giving limited investment diversification.
In the opinion of the researchers, small and mediums-sized pension funds are also missing out on opportunities of international diversification by favouring regional investments.
"It seems likely that differing risk-return assumptions of the various asset classes, the expertise of investment managers and personal preferences of pension fund boards also play an important role," they presumed.
The researchers also suggested that further consolidation of the Dutch pension sector - through mergers or cooperation - might contribute to improving pension funds' investment policy.
The studies findings noted that the Dutch pensions sector has assets exceeding GDP. However, the crash in equity prices, in combination with a decline in long-term interest rates, caused pension assets to drop in value by 17% in 2008.
If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email firstname.lastname@example.org