In new research, co-authors and I demonstrate that people are more likely to invest their own money in the stock market after their pension fund increases its allocation to stocks. This finding suggests that individuals learn from their pension fund. A back-of-the-envelope calculation indicates that households have invested USD 750 billion into global capital markets over the past decade, equivalent to just over 1% of OECD countries’ GDP, in response to increased pension fund investments in capital markets.
Over recent decades and to today, pension savings are shifting from defined benefit to defined contribution schemes. As a result, people are becoming increasingly exposed to the returns and risks of financial markets through their pension savings. This raises an important question: do these fundamental changes to pension savings schemes influence individuals’ other financial decisions?
In new research (link)—which, in fact, is not so new but the result of several years of work—Ulf Nielsson (link), Oliver-Alexander Press (link), Ofer Setty (link), and I set out to investigate this question. Here, I summarise our findings.
The design of our study
As part of the global transition from defined benefit to defined contribution plans, in 2011–2012, a large Danish pension fund offered its members the opportunity to change from a pension product with low equity market exposure (a “guaranteed” product) to a product with high equity market exposure (a “market-sensitive” product). Our goal is to investigate whether members who became more exposed to equities in their pension savings subsequently became more likely to invest in the stock market using their non-pension savings.
The pension fund we study is Juristernes og Økonomernes Pensionskasse (JØP), which is the pension fund for lawyers and economists in Denmark (in 2019, JØP changed its name to P+). The pension fund has app. 120,000 members and EUR 23 billion under management in 2024.
Prior to 2005, all members of JØP were offered a guaranteed rate product. To secure this guarantee, the pension fund invested almost exclusively in safe assets. In fact, 90% of the assets were invested in low-return safe bonds.
Low interest rates, unexpected increases in life expectancy, and Solvency II regulations prompted JØP to offer its members to switch pension products, from the guaranteed product to a product that would permit the pension fund to invest more freely in assets such as stocks and riskier bonds. This would entail a greater financial risk but also larger expected pension payments upon retirement. Members were informed of these differences via a letter and on the pension fund’s website, where they could change products. In the new product, the fraction allocated to safe assets was considerably lower than in the guaranteed product, around 30-40% after a couple of years, with the remainder being invested in stocks, corporate bonds, etc.
Results
Figure 1 shows our main result. The figure compares (a) the stock market participation rate of pension fund members who changed to the high equity exposure pension product to (b) the participation rate of a matched sample of members who did not change products, where none of them held stocks before the offer to switch.
Figure 1. The figure shows stock market entry rates over time for those pension fund members who changed from low to high equity exposure products, and those who kept their low equity exposure products.
We find that members who changed pension products in 2011 were subsequently more likely to enter the stock market in their non-pension portfolios than members who did not change products. The effect is persistent: with each year that passes since the product change, more and more affected individuals enter the stock market.
Seven years after the change of pension products, affected individuals are seven percentage points more likely to enter the stock market with their non-pension portfolio, compared to non-affected individuals. Since the average stock market participation rate in our sample is 35%, the effect corresponds to a 20% increase in the overall probability of stock market participation, an economically large effect.
We find that people primarily invest through mutual funds, i.e. diversified investments, and less so through individual stocks.
Explanations
Our explanation for these results is that the unexpected and exogenously given opportunity to change the stock market exposure in households’ pension plans, along with the information they received, effectively lowered their stock market participation costs. But alternative explanations exist and must be investigated.
One alternative explanation is that those pension fund members who changed pension products are less risk averse. While this explanation appears unlikely at closer examination, since neither the treatment nor the control group participated in the stock market before the opportunity to change pension products, we nevertheless compare insurance take-up between the two groups. For unemployment insurance enrolment (voluntary in Denmark), we find no difference in insurance take-up.
A second alternative explanation is that those who changed pension products are more active than those who did not change products. To address this, we exploit the fact that some people changed pension products in 2011, while others delayed their change to 2012 (a possibility offered by the pension fund). In contrast to activeness driving our results, we find no difference in stock market entry rates between the two groups.
Third, we test for peer effects. If our findings are indeed driven by a reduction in non-monetary participation costs—due to learning about stock markets through exposure to them in pension savings—the affected pension fund member might reasonably be expected to share this knowledge with their spouse. To explore this hypothesis, we examine whether a family member, other than the individual who changed pension products, also entered the stock market subsequently. Our results consistently reveal similar effects on stock market entry, albeit intuitively smaller in magnitude, as Figure 2 shows.
Figure 2. The figure shows estimates of the difference in stock market participation rates between family members of those who changed from low to high equity exposure products, and family members of those who kept their low equity exposure products every year after the product change. The figure shows the point estimates and the 95% confidence interval.
Based on these and many other tests detailed in our paper (link), we conclude that the most likely explanation for our results is that pension fund members learn from their fund’s investment decisions.
Theory
Our finding that an increase in households’ risky allocation in their pension fund increases their participation in the stock market using non-pension savings goes against standard economic theory that predicts that households who consider the risk of their entire wealth portfolio should decrease the risky asset allocation of their non-pension investments.
To help us interpret our empirical findings, we develop a simple two-period theoretical model comprising working period and retirement period. The model draws on a large academic literature which argues that individuals face participation costs when investing in stock markets. In our model, like in the data, investors choose whether to stay with their default pension product, which is invested safely and provides a relatively low return, or to change to a pension product with a higher stock market exposure to achieve a higher expected return.
Investors who choose the pension product with the higher stock market exposure will face a lower barrier to entry into the stock market when investing their non-pension savings because they learn from their pension fund.
Our theoretical model shows that when investors encounter reduced barriers to stock market entry via their pension savings, they tend to increase the equity exposure of both their pension and non-pension savings, as we also find in the data.
Furthermore, the persistent effect we find empirically is consistent with a multiperiod extension of our theoretical model, where a gradual decrease over time in barriers to entry leads to a gradual increase in stock market participation.
Macroeconomic implications
We evaluate the average multiplier effect of each DKK pension wealth invested in the stock market. To do this, we perform a back-of-the-envelope calculation to determine the average difference in non-pension stock market investment between individuals who changed products and the matched individuals who did not, divided by the difference in pension wealth invested in stocks.
The calculations indicate that for each DKK the pension fund invests in the stock market, resulting from the transfer of wealth from low to high equity products, an additional four cents are invested privately in stocks by affected pension fund members.
To put this 4% into context, consider that assets under management by pension funds in the OECD area have increased from 64% of OECD-area GDP in 2011 to 105% of GDP in 2021, while the share of risky assets in pension fund investments has increased from 40% to 56%. This implies that pension funds have increased their investments in risky assets from 64 ∙ 0.4 = 26% of OECD-area GDP in 2011 to 105 ∙ 0.56 = 59% of GDP, an increase of 33 percentage points.
Applying our estimated multiplier to this increase in pensions funds’ risky assets results in 33 ∙ 0.04 = 1.3% of OECD-area GDP, or USD 0.75 trillion. In other words, our results indicate that global capital markets have deepened by an additional USD 0.75 trillion as pension funds have invested more in risky assets over the past decade.
This is, of course, a back-of-the-envelope calculation. Nevertheless, it illustrates that even small spill-over effects from pension funds to households can have economically meaningful implications for capital markets.
Conclusion
In many countries, pension systems are shifting from being predominantly defined benefit—where the sponsor is the primary bearer of risk—to defined contribution, where the individual assumes the risk. An important question is whether this transition influences how pension fund members invest their other savings.
Co-authors and I investigate this question using a unique set-up that allows us to compare pension fund members who become more exposed to equity risk in their pension savings with members who do not, while also tracking their non-pension investments. Conducting such an analysis requires highly detailed data, which we are fortunate to have access to.
Our findings indicate that individuals learn from their pension fund, becoming more likely to invest their non-pension savings in the stock market after experiencing greater exposure to equities in their pension fund. We propose that this effect can have macroeconomic implications. By shaping their members’ understanding of capital markets, pension funds can contribute to deeper markets. The hope is that deeper capital markets may enhance corporate investments and, ultimately, support economic growth.
