Pension fund's illiquid assets allocation under liquidity and capital requirements

Dirk Broeders*, Kristy A. E. Jansen, Bas J. M. Werker

*Corresponding author for this work

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Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.
Original languageEnglish
Article number1474747219000398
Pages (from-to)102-124
Number of pages23
JournalJournal of Pension Economics & Finance
Issue number1
Early online date2020
Publication statusPublished - Jan 2021

JEL classifications

  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"
  • g11 - "Portfolio Choice; Investment Decisions"


  • Illiquid assets
  • asset allocation
  • asset liability management
  • capital requirements
  • liquidity requirements
  • pension funds
  • illiquid assets
  • Asset allocation

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