Patience and Impatience in Retirement Capital: American, Dutch, and Finnish Occupational

Pension Systems Compared

Michael A. McCarthyMarquette University

Ville-Pekka SorsaHanken School of Economics

Natascha van der ZwanLeiden University

Background

• Varieties of Capitalism literature: time horizon of capital is one of the most significant determinants of variation between different types of capitalism– The ’electronic herd’ of equity, hedge funds etc. in LMEs vs. the

inherently ’patient’ capital of banks, family ownership etc. in CMEs

• Recent critiques:– No investor is inherently ’patient’ or ’impatient’, all investors can have

both types of investment (e.g. banks in CMEs)– Different kinds of (institutional) investors can take the role of patient

capital (Dixon)– Time horizons adopted by institutional investors depend on the

interests of different societal actors (Naczyk)

Research agenda: varieties of pension fund capitalism compared

• When, how and why do pension funds become more ‘patient’ or ‘impatient’ (in the different meanings of the term)?

• Pension funds relevant for testing whether institutional investors are inherently patient or not– Pension capital exists in LMEs as well as CMEs, much

institutional variation between and within different MEs– Pensions are at the frontier of financialization

• Comparative case study on occupational pensions in the United States, the Netherlands and Finland from post-war years until today

Patient vs. impatient pension capital

Context Forms of patience Forms of impatience

Investment style Long holding periods and low turnover rates

Short holding periods and high turnover rates

Financial instruments Assets seeking profit from long-term deals and the ’back end’ of projects (e.g. long-term corporate bonds)

Economically targeted investment (e.g. housing, infrastructure)

Short-term profit maximization or risk optimization (e.g. hedge funds)

MPT: all asset classes treated with same criteria

Strategic relationships between investors and management

Loyalty / ’working capital’Voice / ’anchor ownership’ or shareholder activism

Exit / divestment

Theoretical framework

• Three institutional arenas shaping investors’ time horizons:– Professional norms of finance– Financial regulation– Collective bargaining

• These institutions are analyzed as arenas in which states, firms and labour can pursue their interest

• The three cases differ significantly in terms of applicable and prevalent professional norms, forms of regulation, and collective bargaining systems – and institutional design of pension schemes

Main findings

• Increasing impatience over time in all three cases – but thanks to different institutional mechanisms

• Employers have been able to pursue their interest most effectively thanks to– financial regulation in the US & Finland (fear of pension fund

socialism)– consent of labour in the NL & Finland (search for higher

profitability)• Shift in patient investment from bond-based ’working

capital’ to shareholder activism and/or anchor ownership

 Investment style Types of financial instruments  Governance

  e.g. long holding periods, low turnover rates

e.g. long-term bonds or loans

e.g. economically targeted investment

e.g. anchor ownership, shareholder engagement, proxy voting

United StatesNo reliable data available.

Prior to 1960s: US securities and bonds. Since mid-1960s: corporate equity

Limited

Multi-employer funds more involved in proxy voting and shareholder engagement

NetherlandsLimited data available.

Prior to 1990s: bonds and loans. After 1990: corporate equity

Limited

Since 1990s, proxy voting and shareholder engagement

Finland

Limited data available. Long-term bonds (usually 10 years) dominant until 1980s

Until mid-1990s: premium loans and long-term bonds. Highly diversified after late 1990s

“Investment loans” until 1980s

Domestic anchor ownership since late 1990s.

United States

• Financial regulation:– Taft-Hartley Act (1947): employer administration of

funds – Employee Retirement Income Security Act (1974):

prudent person rule • Labor-management relations: – Single-employer funds: investment in own stock– Multi-employer funds: more targeted investment

• Professional norms: – Modern portfolio theory predates ERISA

Netherlands

• Government regulation: – 1952 Pension and Savings Funds Act: solid investment rule– 2007 Pension Act: prudent person rule – But: solvency rules!

• Labor-management relations:– Joint administration of pension funds – Employers: more equity investments to reduce costs– Unions: reluctant agreement

• Professional norms:– Modern portfolio theory but also adoption ESG-criteria

Finland• Nation-wide earnings-related pension scheme for private sector workers 1962-

(mandatory, DB, partly funded, privately managed, decentralized with competition)

• Financial regulation:– Tight solvency rules blocking equity investment (-1997)– Premium loan mechanism – Polarization of impatience since 2006

• Labor-management relations: – Joint administration of pension funds, but more strategic supervisory role since 1997 –

empowered prevailing professional norms– More profitable and more broadly diversified investment to reduce costs since mid-

1990s• Professional norms:

– Separate norms from the financial industry – ETI-prized until 1980s, social responsibility norms in the 2000s

– Replacement of investment staff in early 1990s

Conclusions• Pension funds are not inherently patient or impatient• In all three cases, pension capital is increasingly impatient but also

polarized• The main forms of patience adopted since the 1990s – anchor

ownership and shareholder activism – are highly compatible with MPT

• Institutional explanations for the dominant time horizons of pension capital vary

• Further research needed:– Holding periods and turnover rates of PFs in different economies– The effects of pension plan design and organizational form of PFs to time

horizons– A similar analysis on other institutional investors!