Interest rates and pension fund risk-taking: new cross-country evidence

This paper studies the impact of low interest rates on pension fund risk-taking. I assemble a new cross-country dataset encompassing portfolio holdings of over 100 large pension funds. The data reveal that pension funds increased their exposure to riskier asset classes, such as equities and alternatives, in the low interest rate period after the global financial crisis. Using an instrumental variables approach, I estimate that pension funds increase their exposure to risky assets when domestic interest rates fall. A 25 basis point decline in interest rates is associated with a 0.51 percentage point increase in pension funds’ share of risky assets. This behavior is most pronounced for mature and underfunded pension funds, facing greater pressure to generate returns.