In the Netherlands a corporate pension fund is legally separate from its sponsoring firm (the sponsor). The pension fund’s board, in which employers and employees have 50/50 representation, decide on matters such as the level of contributions and the composition of the investments. Among other things, the supervisor checks that the fund has adequate funding to meet its pension liabilities. If the funding ratio is insufficient, the pension fund’s board must take measures. Options for increasing the funding ratio are: a rise in contributions, no indexation of pensions or, in the last resort, a reduction in pension rights. But sometimes the sponsor is willing to pay a one-off contribution into the pension fund to alleviate the fund’s financial problems. Obviously a company that is itself well-funded will be more inclined to take that option. In this light, it is conceivable that the financial position of the pension fund depends in part on the financial position of the sponsor.
DNB has researched whether the sponsor’s financial and other characteristics influence the level of sponsor contributions to corporate pension funds in the Netherlands. A combined dataset on around 200 corporate pension funds and their sponsoring firms was statistically examined. The results indicate that, on average, small and unprofitable firms contribute less to the funds. This is to be expected as such firms are generally less financially strong. No evidence was found that companies with a high degree of leverage contributed less. According to the theoretical literature, this can be explained by the tax effects for the firm: interest payments on debt are tax deductible, as are employers' contributions.
The results regarding pension investments show no significant relationship between the sponsor's financial position and the way in which pension capital is invested. Sponsor’s leverage was not found to have any significant effects on asset allocation.
The characteristics of pension funds themselves obviously also influence pension funding and investments. On average, corporate pension funds with a defined benefit system (which make up by far the greater share of the sample selection) invest more in equity than their defined contribution counterparts. Nominal payments from defined benefit funds are generally known in advance, whereas payments from defined contribution funds depend in part on investment performance. Large well-funded funds with many young members invest relatively more in equity.