Pension Fund Interconnectedness and Herd Behavior

Research Retrieved: December 2018
Retrieve the paper from the SSRN


The well-developed sector of occupational pension funds in the Netherlands displays a high level of interconnections. Interconnections are defined as pension funds sharing one of the board of trustees’ member, one actuary or one asset manager. The paper tries to assess whether these interconnections running through pension funds affect their strategic investment decisions. In fact, the authors try to understand if shared trustees, actuaries or managers lead pension funds to invest similarly. If this is the case, pension funds will display herd behavior.

Key Findings

  • Interconnections affect investment decisions. Pension funds interconnected through actuaries make similar investment decisions concerning alternative assets. The interconnections through asset managers generate strong herd behavior in both alternative asset classes and standard asset classes such as equity and fixed income. Trustees interconnections however do not lead to herd behavior.
  • Asset managers are able to influence most of the strategic investment decisions in their network of interconnected pension funds. This is possible thanks to their skills and negotiating power.
  • By grouping pension funds by their maturity no signs of similar investment decisions are detected.

Practical relevance

Actuaries and asset managers play a dominant role in strategic decision-making, both in terms of advisory power and in terms of information transfer among different pension funds. Similar investment decisions propagate within their network of pension funds. It is possible to observe a shared-actuary and shared-manager effect on the strategic asset allocation (SAA) of pension funds, which cause herd behavior. Because of herding pension funds might develop a SAAs not appropriate to their organizational structure, knowledge level, and size. Moreover, pension funds with similar maturities do not show any portfolio co-movements in face of strong portfolio co-movements displayed by interconnected pension funds. This finding indicates that network pressure is as important as the matching liabilities criterion in SAA decisions.