Defined Benefit and Defined Contribution Pensions: Patterns in Investment Approach as Evidenced by the Nature of the Demand for Shares

Finance

Further details

This study evidences patterns in the investment approach of DB and DC pension schemes by examining the nature of their demand for shares. This is performed by organising pension fund demand for shares according to four factors: market liquidity, portfolio theory, accounting performance and performance on corporate responsibility. Findings suggest that, compared to DC schemes, DB schemes have greater demand for shares with higher expected return. Presuming investment performance will affect the amount of pension, a weaker preference for expected returns implies lower average future retirement outcomes for members. DC schemes take significant positions around fund management styles of value and growth whereas DB schemes do not. Performance on corporate responsibility significantly influences the demand for shares by DC schemes but not For DB schemes. Presuming that institutional interest in corporate responsibility is a proxy for a long investment time horizon, this suggests that DC schemes set an investment approach that looks further ahead than DB schemes. This speaks to policy, research and practice that is interested in developing greater understanding of the consequences of the switch from defined benefit to defined contribution pension provision.