In all of western society, Pension systems are the cornerstone of care for the elderly. Pension systems provide the elderly with income and financial security for the future and occasionally health insurance. Pension spending in the EU occupies a huge part of total GDP spending. In some countries, for example in Italy, this can reach up to 14% of total national GDP spending according to the OECD pension databank. Pension systems, thus play an important role in government policy especially considering the aging trend we see in Europe. With all the money that has been funnelled in to pension funds, the pension market constitutes one of the largest investors in the world. The assets of the global pension market have surpassed the 24 trillion mark in 2013 (OECD, 2013). Some countries have amassed gigantic pension funds sometimes up to 166% of GDP in the case of the Netherlands.
However, not all Pension systems are the same. The classification for the Pension system mainly consists of 3 Pillars as classified by the World Bank. The first pillar is commonly referred to as the PAY-as you go system which means that pensions paid to current pensioners are financed from contributions paid by the working now which are levied through income taxes. The second pillar mainly refers to the pension funds where the working class contribute their earnings, which is reinvested and handed over to the individual when they retire. The third pillar finally, refers to voluntary private funded accounts. Countries differ in how much focus is laid on each pillar. In the Netherlands, the second pillar is really strong in leading to pension funds amassed of over 166% of GDP while in other countries the second pillar is almost non-existent and the focus is mainly on the first pillar. In this thesis, the focus will be on the third pillar of the Canadian pension system. In Canada, the third pillar consists of occupational pension schemes for public or private workers which they can opt out of if they wish to do so. More specifically, the focus will be on the occupational schemes provided by the 100 biggest funds in Canada. To limit the focus of this research, this thesis looks only at the 100 biggest occupational pension funds in Canada.
The pension funds have the important task of investing the money given to them by their participants. The way their asset portfolio is constructed would depend on the risk appetite of the pension fund. Risk appetite can be defined as the ‘ willingness to take risks in order to meet strategic objectives’. In the pension fund context, we can proxy for risk appetite by looking at the equity share as explained in the life cycle theory (Pension funds can differ in their risk appetite), this leads to different asset allocation between pension funds as riskier pension funds would increase their equity shares as these give higher return but also carry more risk while funds that opt for a lower risk appetite would opts more riskless assets. It would be interesting to research what drives this difference in risk appetite (equity share) leading to the following research question:
What drives the risk appetite (equity share) of Pension funds in Canada?