Download Investment Preferences and Patient Capital: Financing, Governance

Investment Preferences and Patient Capital:
Financing, Governance, and Regulation in Pension Fund Capitalism
Michael A. McCarthy, Marquette University
Ville-Pekka Sorsa, Hanken School of Economics
Natascha van der Zwan, Leiden University
Abstract
In comparative political economy, the patience of capital investment has often been explained
with the political activity of stakeholders. Such scholarship attributes investment preferences
to either set assumptions about what various actors are likely to want from their pension systems
or to macro-level institutional factors. Comparing the preferences of business and labor actors
in the occupational pension systems in Finland, the Netherlands, and the United States, we
argue that preferences are better explained with a more dynamic view of preferences, one that
emerges from meso-level institutional forces. We find that financing needs and capacities,
governance capacities, and financial regulations explain changes in labor and business
preferences with regard to fund investment. In each of the cases, a combination of these three
institutional factors explains a preference shift toward more varied and more impatient
investing.
Keywords: financial regulation, governance, institutional work, patient capital, pension
funds, pensions
JEL classification: P16 political economy, G23 institutional investors
Corresponding author: [email protected]
Final version of this paper appeared in Socio-Economic Review, Vol. 14, No. 4 (2016).
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1. Introduction
Scholars of comparative political economy (CPE) understand the time horizon of capital as ‘one
of the most significant determinants of variation between different types of capitalism’
(Estevez-Abe, 2001, p. 190). They associate capital that allows firms to conduct long-term
business operations, often termed patient capital, with particular investment paradigms
(Jackson and Vitols, 2001), particular groups of investors (Nölke and Perry, 2007), and
particular types of macro-level politico-economic institutions (Culpepper, 2010). As a number
of studies (Dixon, 2011; Estevez-Abe, 2001; Naczyk, 2013; 2016) have argued, pension capital
is not inherently patient or impatient, but rather becomes patient or impatient through the
political action of firms and unions. But while previous literature has correctly highlighted the
importance of firms and unions, it pays scant attention to the factors that explain business and
labor preferences with respect to the patience of pension funds’ investments over time. More
often, CPE scholars have attributed set preferences regarding patient or impatient pension
capital to business and labor actors in light of their financial interests (Gourevitch and Shinn,
2007), power resources over parent companies (Engelen et al., 2008), pension liabilities (Goyer,
2006), macro-level institutional positions (Wiß, 2015) or institutional complementarities
(Amable et al., 2005; Deeg, 2007). We argue that institutional attribution of business and labor
preferences is a more dynamic process than previous research suggests.
We compared the occupational pension systems in three countries – Finland, the
Netherlands, and the United States – to analyze the development of business and labor actors’
preferences over the patient and impatient uses of pension capital. We selected our cases with
a diverse case study approach. On the macro-level, our cases represent different varieties of
capitalism and types of welfare regimes: the first being social-democratic, second corporatist,
and the last liberal (Esping-Andersen, 1999). The meso-level institutional design of the pension
schemes also varies significantly. The Dutch fully funded occupational scheme is (quasi2
)mandatory and predominantly based on defined benefit (DB) plans, while the American
scheme is non-mandatory and heavily reliant on defined contribution (DC) plans. The Finnish
partly funded earnings-related scheme is a more centralized mandatory social insurance system
with a homogenous DB plan. Despite these differences, the investment of pension capital is
salient in all three political economies, since each has a mature occupational pension system
characterized by a high degree of financialization in terms of accumulated assets (Ebbinghaus
and Whiteside 2012).
We observe similar, although historically varied and temporally uneven transitions in the
nature and degree of patience and impatience in the investment practices of the three schemes.
However, we do not find identical stances or actions regarding the preferences for patient or
impatient capital between the key institutional actors of these schemes. Financial interests and
development of pension liabilities offer only a limited explanation, as business and labor actors
have demonstrated different preferences over im/patience in face of these issues. Institutional
complementarities also offer little explanatory force, as evidenced by the different macro-level
institutional contexts in which similar preferences were found in our three cases.
On the basis of our analysis, we propose an alternative view to these explanations, one
that focuses on the formation of actor preferences through meso-level institutional dynamics.
Drawing on scholarship on institutional work (Lawrence et al., 2009), we analyze preferences
as rationales and objectives of attempts of business and labor actors to institute, maintain and
disrupt institutional structures affecting investment practices of pension funds. We identify
three factors that have shaped business and labor’s preferences over pension fund investment
policy over time: 1) financing needs and capacities, 2) governance capacities, and 3) the
financial regulations set by the government. Together, they constitute the domains in which
preferences regarding im/patience compete, and set the conditions under which business and
labor actors define and change their objectives with respect to uses of pension capital.
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In the following sections of this paper, we further specify and elaborate on our argument.
In the first part, we identify different approaches to patient capital in existing scholarship on
pension funds and CPE. We describe our theoretical framework for explaining the changes in
the preferred form and degree of patience within each pension system (Section 2). We then
show the investment trajectories from the post-war years until today in our three case studies
and describe changes in the patient and impatient uses of pension capital (Section 3). We then
describe and explain the key changes that have shaped the preferred uses of pension capital in
each case (Sections 4-6). Finally, we will summarize our findings and suggest some avenues
for future research (Section 7).
2. Pension Funds and Patient Capital
As Deeg and Hardie (this issue) note, patient capital refers to equity or debt whose providers
do not require asset managers to respond to short-term market pressures, but instead enable
and/or promote the realization of long-term business and management strategy. In the Varieties
of Capitalism (VOC) approach, patient capital is a key feature distinguishing CMEs from LMEs
(Estevez-Abe 2001, p. 190). In CMEs, long-term bank financing, family ownership, crossshareholding among companies and – in some countries – government ownership and control
of large firms are seen as key sources of patient capital (Peters, 2011). By the same token,
scholars contrast the long-term liabilities of pension funds, which enable long-term
shareholdings and bond investments, with mutual and hedge funds whose short-term
optimization strategies represent the impatient capital of the ‘electronic herd’ (Goyer, 2006;
Jackson and Vitols, 2001). Still, as Vidra (this issue) also shows, capitalist varieties do not
necessarily cause im/patience.
In scholarship on pension funds, patient capital is associated with the intentional use of
pension capital to four different objectives: the provision of financing for long-term business
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operations; economically targeted long-term investment; passive ‘anchor’ ownership; and
active corporate engagement, aimed at promoting long-term management strategies. The first
enables long-term business operations and provides them liquidity often, but not exclusively,
through corporate bonds and loans (Estevez-Abe, 2001). Economically targeted investment
consists of instruments directly seeking to produce dynamic economic effects that facilitate
longer-term investment returns (Barber and Ghilarducci, 1993). Anchor ownership refers to
passive loyalty-based ownership that promotes stability for the realization of long-term
management strategy (Culpepper, 2010, p. 26). Such strategies may, for example, seek to shield
core strategic investee firms from hostile takeovers. In contrast, corporate engagement refers to
shareholder activism that pushes firms to adopt longer-term business strategies in annual
meetings and governing boards (Carroll, 2012). Although there is no broadly agreed definition
of impatience in the scholarship on pension funds, it can be defined as the opposite of the four
strategies: financing for firms for other than long-term operations; investment in targets seeking
short-term returns; ‘exit’ based equity investment strategies; and active corporate engagement
to promote short-term business models.
Recently, scholars have questioned the inherent patience of certain types of investors.
Some argue that different types of investors can take the role of patient capital whatever the
variety of capitalism (Dixon, 2011). Some observe that time horizons of institutional investment
are influenced by the political and business interests that helped to create the investors in the
first place (Naczyk, 2013). Moreover, institutional investments can have both patient and
impatient uses. Pension funds can be patient in the sense that they invest in economically
targeted ways but also highly impatient by investing in private equity funds associated with
hostile takeovers or hedge funds with high turnover rates (Dixon, 2008). Similar critiques are
raised regarding the use of bank capital in CME’s, which have become much less long-term
oriented during the last few decades (Hardie et al., 2013). Macro-level political-economic
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institutions seem to offer only a partial explanation for the patience of capital in the limited
sense that they might empower certain institutional actors more than others in promoting their
agendas (Naczyk, 2016).
In short, recent research suggests that the extent to which patient or impatient uses of
capital are put into practice depends on the realization of preferences held by actors occupying
central positions in the pension system. While we broadly agree with these findings, we argue
that they underspecify the causal mechanisms that shape institutional actors’ preferred uses of
capital. Preferences regarding im/patience have been thus far attributed to set assumptions on
institutional actors’ financial interests or interests in face of using power over parent companies
of pension funds (Gourevitch and Shinn, 2007), pension liabilities (Goyer, 2006), macro-level
institutional positions (Wiß, 2015), or institutional complementarities (Amable et al., 2005;
Deeg, 2007). In this paper, we take a different position. We argue that the preferences over
im/patience are contingent upon more dynamic historical factors. Our approach to im/patience
is similar to Knafo and Dutta (this issue) and Van Loon and Aalbers (2017). By turning to the
history we try to understand the context in which actors’ investment preferences are made.
Drawing on scholarship on institutional work (Lawrence et al., 2009), we argue that actor
preferences over patient or impatient uses of pension capital can be best identified by looking
at the intentional attempts of these actors to institute, maintain and disrupt institutional
structures promoting patient or impatient uses of pension capital. Our analysis is specifically
focused on meso-level institutions (e.g., pension scheme design, organizational forms of
pension funds, investment and solvency rules, norms and codes of conduct related to
investment) and two sets of institutional actors: business actors (employers, business
associations and central employer associations) and labor actors (employees, unions and central
trade union organizations). Business and labor actors have long been recognized as the key
institutional actors when it comes to occupational pensions (e.g. Ebbinghaus, 2011).
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In our comparative study of Finland, the Netherlands, and the United States, we identify
three institutional factors whose dynamics have shaped business and labor’s preferences over
investment allocation: 1) financing needs and capacities; 2) governance capacities; 3) the
financial regulations set by the government. We find a two-directional and cyclical relationship
between preferences and institutional pressures in these three domains. We argue that business
and labor will likely prefer more patience or impatience when such investment is perceived to
provide higher returns than other types of investment at times when funding needs are high.
But they can also seek to change the financing needs to maintain a preferred use of capital
against other actors’ efforts. Similarly, business and labor are likely to push for patience or
impatience when it offers channels for control over pension schemes, pension funds or investee
firms. But they may also give up their own governance capacities or seek to decrease the
capacities of other actors to maintain a preferred use of pension capital. Finally, business and
labor may avoid promoting investment practices that might be interpreted as illegal or promote
practices that improve compliance, but they may also seek to promote or maintain regulations
that institute their preferred investment practices or prevent other actors from influencing
investment.
3. Pension Investment Trajectories in the United States, the Netherlands and Finland
The research on our three case countries show similar shifts in investment practices within
occupational pension funds, most importantly a redirection of investment in predominantly
patient long-term investments towards more varied and short-term oriented investments. More
specifically, they are all characterized by a decrease of long-term bond investment and/or
lending, complemented with an increased importance of impatient equity investment in
investment portfolios. Moreover, we find that evidence from our three cases suggests that the
capacity of pension funds to serve as patient investors has been limited in each of the cases.
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The similarities between uses of pension capital in the three cases are remarkable considering
the institutional differences between the welfare regimes and pension systems.
In the United States, the shift toward less patient uses of pension capital occurred in the
late 1950s, earlier than our other cases (see Figure 1). Nearly all pension funds established after
the Great Depression of the 1930s opted for long-term and low-risk investment. In 1950, longerterm corporate bonds and US government securities accounted for 41.8% and 29.9% of fund
assets, respectively. Alternatively, corporate equities only accounted for 16.4% of assets. Two
decades later, however, asset allocations had changed considerably. By 1972, government
securities and corporate bonds only accounted for 2.4% and 17.7% respectively, while
corporate equities accounted for 73.8% of pension capital invested.
Pension funds’ turnover rates with respect to equity investments started to increase in
the 1970s with the embrace of more active management. Drawing on a sample of pension plans
by using the Department of Labor’s Form 5500, researchers found that pension portfolio
turnover between 1977 and 1983 typically ranged between 60 and 80 percent. Within the
equities portion of the portfolios turnover increased from 30 to 40 percent in 1977 to 90 to 100
percent in 1983 (Ippolito and Turner, 1987). Since then, equities have remained the preferred
asset class for fund managers, alongside growing investment in mutual funds and hedge funds
with various types of short-term investment strategies (Preqin, 2015). Profitability and liquidity
requirements and regulations drive investment decisions, which in part limits pension funds’
ability to promote economically targeted investment or ‘anchor ownership’ based on large-scale
ownership in individual firms (Clark and Hebb, 2005). Moreover, only a small minority of
pension funds have attempted to shape firm governance in active engagement, and often
unsuccessfully (McCarthy, 2014b).
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Figure 1 Asset Distribution of Noninsured Private Pension Funds in the United States, 1950–
1979.
100
90
80
70
60
50
40
30
20
10
Government Securities
Corporate Bonds
Shares
Mortages
Demand Deposits & Currency
Time Deposits
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
1959
1958
1957
1956
1955
1954
1953
1952
1951
1950
0
Other
Source: Authors’ calculations from Barth and Cordes (1981)
As in the United States, the majority of the €1.2 trillion held by Dutch pension funds –
around 42% – is invested in corporate equities. Unlike the United States, however, pension
funds’ strong reliance on equity investments is a fairly recent phenomenon. Until the late 1990s,
Dutch pension funds invested predominantly in fixed-income assets (see Figure 2). Following
World War 2, Dutch pension funds provided investment capital to the rapidly industrializing
economy through bonds and direct long-term loans with a maturity of at least 10 years. By
1960, pension funds accounted for 83,4% of total lending in the Netherlands (Goslings, 1998,
p. 973). Besides forming a direct credit line to Dutch central and local governments (39% of
total investments in 1960), pension funds provided capital to public and private enterprises in
various sectors of the economy, most importantly banks and credit institutions (9%),
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transportation (5%), public utilities (5%) and the metalworking industries (5%)
(Verzekeringskamer, 1961).
Figure 2 Asset Distribution of Dutch Pension Funds, 1960-2014.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Real Estate
Mortgages
Shares
Bonds
Loans
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1972
1970
1968
1966
1964
1962
1960
0%
Other
Sources: Pensioen- en Verzekeringskamer, Financiële Gegevens Pensioenfondsen (Apeldoorn,
multiple years); CBS, ‘CBS Statline’, online database, for years 2003-2014.
From the mid-1980s onwards, these patterns began to change. The percentage of the
portfolio invested in direct loans decreased rapidly, while investment in corporate equities rose.
Dutch funds also began to invest in financial derivatives and alternative asset classes, such as
private equity and hedge funds. Meanwhile, average turnover rates increased considerably,
especially for equity holdings: from a typical 10-20% in 1965 to around 120% for company
funds and 105% for industry-wide funds in 1994 (Boshuizen and Pijpers, 2000, p. 20-21). By
comparison: turnover rates in long-term loans never exceeded 40% during the same period
(ibid.). Finally, investments outside the domestic economy substantially decreased over time:
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from 1% of total assets in 1980 to 20% in 1994 (CBS, 2016). By 2008, 76% of Dutch pension
assets were invested abroad (ibid.).
The Finnish trajectory includes a shift from long-term loan provision for domestic
industrial production to actively managed, internationally diversified portfolios since the late
1990s. From the early 1960s, patient long-term lending accounted for over 80% of investment
allocations. The main loans were the so-called premium loans, which typically had a maturity
of ten years. Employers could borrow these cheap loans from the pension contributions they
paid, or, more precisely, pay the contributions in bonds instead of cash. In analogy to German
book reserves (Deeg, 2005), they provided working capital for long-term business
operations and improved firms’ access to bank loans. Other main loans were investment loans,
or economically targeted loans with long maturities of typically ten years. They were targeted
to industrial production (ca. 50%), trade and trade infrastructure (ca. 20%), and the building
sector (ca. 20 %). The degree of patience started to decrease in the 1970s due to demand-side
factors. The average maturity of loans provided by pension insurance companies dropped from
10 to 6.5 years between mid-1970s and 1985 (Pylkkönen, 1996).
A rapid shift towards investing in other instruments occurred in the 1990s. During the
economic depression of the early 1990s, TEL funds first began to invest in government bonds,
moving toward domestic equity later in the decade. Although turnover rates in domestic equity
rose constantly until 2007 (The Finnish Pension Alliance, 2016), the Finnish funds have acted
as anchor owners in their Finnish investee firms, while not engaging in active ownership
elsewhere (Sorsa, 2013). Since 1997, new solvency and investment rules have gradually
increased liquidity requirements and capped allocations to individual firms and asset classes,
thus limiting pension funds’ ability to invest with long-term perspectives (Sorsa, 2011, p. 144159). Since 2000, Finnish funds have invested about one fourth of their assets in
domestic equity, about 10-20% in foreign equity and actively managed hedge funds, and about
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10% in real estate and real estate funds. The remainder has been invested mostly in various
types of actively managed short-term funds and Western European and American sovereign
and corporate bonds of highly varying maturities.
Figure 3 Asset Distribution of Finnish Pension Insurance Companies, 1980–2014.
Source: The Finnish Pension Alliance (2015)
Notes: Assets are in book value for the years 1980–1996 and in market value from year 1999 onwards.
Assets in the transition period of 1997–1998 are in estimated market values.
4. United States: From Risk Averse Investing to Early Impatience
As noted above, prior to the 1950s, most American pension funds invested in patient, longerterm bonds. The cause of the shift toward impatience lay in the immediate postwar period.
Widespread industrial conflict over the question of fringe benefits between 1945 and 1948
pushed the state to intervene with federal regulations concerning pension governance and
investment. These reshaped business and labor actors’ preferences, many of whom in turn
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promoted impatient pension investing within pension funds. After the war, American unions
led the largest strike wave to that point with the primary aim being the incorporation of fringe
benefits into collective agreements. The United Mine Workers, the United Steel Workers, and
the United Auto Workers all took their members out on national strikes over pensions, which
they not only wanted to be established but wanted an active say in governing and using in
patient ways (McCarthy, 2014a). Organized business actively resisted this labor demand. As
late as 1948, the National Association of Manufacturers advocated for the position that pension
plans “must continue to lie outside the scope of collective bargaining” and the sole prerogative
of management (NAM, 1948).
These early conflicts between labor and management resulted in provisions being
included in the Taft-Hartley Act of 1947 that bore on fund investment decisions. With regard
to pensions, it makes it illegal for employers to contribute to a welfare fund established by a
union. Businesses and conservative politicians worried that if unions were able to win
governance over their funds, they would use them to undermine the American system of free
enterprise. To weaken labor’s governance capacity, the act only allows contributions to funds
that are either administered with or exclusively by employers – employer representatives had
to comprise no less than fifty percent of the pension board of trustees (Fogdall, 2001, p. 219).
As Taft (R-Ohio), one of the act’s authors, argued in Congress, ‘unless we impose some
restrictions we shall find that the welfare fund will become merely a war chest for the particular
union’ (ibid., p. 222). With unions the most vocal proponents of targeted long-term investing
(Ghilarducci, 1992, p. 38), the law curtailed the possibility to use pension capital for more
patient purposes. As a result, many unions dropped patient investment as a goal entirely. Unions
like the United Auto Workers, once advocates, instead turned their attention to questions of
financing. For many the issue of patient fund investment wasn’t raised again until the 1980s
when unions began to revisit it as a means for domestic investment and shareholder voice.
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By the mid-1950s, though, pension regulation drove both the preferences and fund
investment choices to converge towards mainstream practices in American finance (O’Barr and
Conley, 1992). Firms saw diversified equities-based investment as the solution to the financing
problem that many funds faced. If such an approach would yield higher returns over the long
run, as MPT predicted, then firms could contribute less to their pension obligations. TaftHartley afforded firms the capacity to govern solely on the basis of corporate financial
considerations, through a plan fiduciary. As the National Industrial Conference Board pointed
out in 1954, most companies ‘delegate responsibility for investments to corporate trustees and
confine their own activities largely to the personnel aspects of their retirement plans’ (NICB,
1954, p. 10). Most fund managers simply followed financial industry practices when they
allocated the assets in their funds, within the guidelines of financial regulation. While security
was once thought to trump yield, this changed in the 1950s. When the New York State
legislature enacted the prudent person rule in April of 1950, it gave common stock an ‘air of
respectability’ as a legitimate class of assets to invest in (ibid., p. 13). With law being liberalized
and MPT taking form, fund managers were spurred on to invest more heavily in equities.
Though they started slowly, in 1954 most funds imposed a 25 percent limit on the amount
available for stock investment, once the notion that risk could offset itself there was a ‘flood’
of money into equities (Clowes, 2000). While stock investment is not impatient per se, it did
coincide with increasing turnover rates within the funds (Ippolito and Turner, 1987). In other
words, it tended to be used impatiently.
Despite impatience largely being the norm, some labor unions retained considerable hold
of governance and promoted more patient approaches to investment. The majority of unions
did not, such as the United Steel Workers and the United Auto Workers. These unions had
single-employer plans, where one union bargains with a single-employer. However a minority
of unions, like the United Mine Workers, the Teamsters, or many in the building and
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construction trades, bargain in multi-employer plans. Here fund management is negotiated
between several smaller sponsoring employers and a single, typically large, union. In the latter
case, unions often shaped investment decisions, and as a result experimented with targeted and
social investing well into the 1970s (McCarthy, 2014b). And by the onset of deindustrialization
in the 1970s, the main labor organization, the American Federation of Labor-Congress of
Industrial Organizations endorsed the idea of targeted investing for urban revitalization in areas
of America’s rustbelt, in order to revive real levels of domestic investment, but never saw it put
into practice (AFL-CIO, 1978).
By 1974, new regulation, the Employee Retirement Income Security Act (ERISA),
further promoted preferences in impatient investment. First, ERISA prohibits certain
transactions between employee benefit plans and a plan sponsor. With regard to investing in
the sponsoring companies own stock, becoming an anchor investment, the law prohibits the
fund from having more than 10 percent of its assets invested in the sponsoring employer’s
securities (Smith et al., 2009). This has greatly limited the ability of companies to increase
governance capacity by self-investing. Second, ERISA undermined labor’s goals of more
targeted investing by tightening the prudent person rule. The rule, which predates even TaftHartley, makes trustees invest for the sole benefit of the beneficiary, i.e. the future retiree.
ERISA makes the key criteria governing investment choice the rate of return on investments;
if social or other considerations are taken into account, they must be secondary. Third,
investments are required to be diversified by investment vehicle type, geographic location,
industrial sector, and dates of maturity (Blome et al., 2007). This means that an increase of
patient investment requires a proportional increase of more liquid impatient investments. In
practice, ERISA forced plan sponsors and fund fiduciaries to follow the best practices of Wall
Street. This had meant investment in fixed longer-term bonds up to mid-20th century, but MPTbased equity investment afterwards. In a 1977 survey of more than 1,900 pension fund trustees
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by the International Foundation of Employee Benefit Plans, 83 percent of plan fiduciaries said
ERISA made them less willing to invest in anything but blue chip securities thanks to their high
liquidity (International Foundation of Employee Benefit Plans, 1977).
5. The Netherlands: From Sleepy Institutions to Active Investors
Unlike American pension funds, Dutch pension funds did not make the transition to equity
investing and a globally diversified portfolio until the late 1980s. Long characterized as ‘sleepy’
institutions with little interest in active portfolio management, Dutch funds invested
predominantly in fixed-income assets during the immediate postwar period, most importantly
long-term bonds and loans, thus providing much needed capital for the industrializing economy.
Pension funds also directly owned or provided mortgages for stores, residential housing and
office buildings. The Algemeen Burgerlijk Pensioenfonds (ABP), the pension fund for
government employees, held a special position in the Dutch pension landscape: under the
auspices of the Ministry of Finance, the pension fund for civil servants became the most
important purchaser of over-the-counter government debt (Fernandez, 2011, pp. 51-53).
Through their investments, Dutch pension funds were thus deeply entrenched in the postwar
domestic economy.
The 1952 Pension and Savings Funds Act required pension funds to invest their assets
in ‘a solid manner’, while single investment categories could not be excluded. The Act did not
provide a substantive definition of the term ‘solid’, for this could result in ‘an unnecessary
restriction of investment freedom’, according to the legislator (Kuiper and Lutjens, 2011, pp.
158-159). It was generally understood to mean something similar to the prudent person rule in
the United States (ibid.), although this interpretation did not include a similarly strong rejection
of social investing as in the United States. The solid investment rule therefore allowed fund
trustees discretion to set their own investment policy. One source of patient capital, however,
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was cut off. Under the Act, the provision of financing for the sponsoring firm was limited to
5% of the portfolio, effectively blocking the emergence of a Dutch equivalent of the Finnish
premium lending system. This loose regulatory framework remained virtually unchanged until
2006, when the solid investment rule was replaced by a similar prudent person rule in
accordance with EU Institutions for Occupational Retirement Provisions Directive 2003/41/EC.
Financing needs and the expansion of governance capacities explain why both
employers and unions shifted their preferences to variable equity investments over long-term
fixed-income assets. Consensus on the suitability of fixed-income assets as a ‘solid’ investment
of pension assets had vanished by the late 1980s and given way to a growing conviction among
employers that MPT-based corporate equity investment offered more potential to achieve
higher returns to fund growing pension liabilities (Van Gerwen, 2000). Dutch pension contracts
promised final-salary pensions with intermittent cost-of-living-adjustments, making the size of
employers’ contributions particularly sensitive to wage increases and macro-economic
developments. To avoid ever-rising contribution rates and consequent perceived loss of
legitimacy, high returns on investment were needed. As stock markets boomed in the 1980s,
those who committed a larger share of their portfolio to the stock market, such as the Philips
pension fund, saw their rates of return increase to record heights (ibid.). At the turn of the
decade, many large Dutch corporations such as KLM and Unilever reduced or began to
withhold pension contributions altogether. When the government fund ABP was privatized in
1996, its asset allocation quickly began to resemble those of other occupational funds. As
pension investments became more complex, almost all funds outsourced asset management to
external investment managers (Fernandez, 2011).
Investment in corporate equities also helped solidify pension funds’ role in Dutch
corporate governance. Until the mid-1990s, Dutch corporate governance was characterized by
a stakeholder system. Under the so-called structural regime (structuurregime), large
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corporations were required to install a supervisory board with large discretionary powers, yet
limited independence from the managerial board, thus restricting the influence of shareholders
over corporate governance. When development of financial markets spurred policymakers to
reform Dutch corporate governance legislation in the mid-1990s, pension funds, together with
other organized shareholder interests, campaigned to abolish anti-takeover defenses and
preferred share ownership. In turn, large funds such as ABP envisioned a new role as active
investors, who could form protective barriers against hostile takeovers while steering
corporations towards better performance (Frijns et al., 1995). American examples, in particular
the public employee fund CalPERS, provided inspiration for the new Dutch practices (Crist,
1995). Still, industry insiders maintained, such ‘anchor ownership’ should lack the
confrontational politics of American activist pension funds, as they believed investors should
not be involved in the day-to-day of business operations (Frijns et al., 1995).
Union officials initially remained reluctant to support investment in corporate equity.
They considered the stock market too volatile to wager workers’ pensions on. Its reluctance to
accept investment in shares placed the labor movement in a difficult position. To maintain finalsalary pension schemes, pension funds needed to achieve either high investment returns or raise
contributions. At a time of high unemployment, the latter option proved politically unfeasible.
By the early 1990s, then, some unions began to use asset allocation as a bargaining chip in
negotiations with employers. They agreed to lower pension contributions, provided pension
funds invest more in corporate shares (NRC Handelsblad, 1992). As investment in equities
increased, union federations CNV and FNV developed guidelines for their representatives on
pension fund boards. Although the guidelines pushed for the consideration of social and
environmental factors when investing, the organizations agreed with employers that
investments should not jeopardize returns or place the fund in the position of activist
shareholder, even in the case of labor conflicts (FNV, 2000). For that reason, FNV explicitly
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rejected investment in activist hedge funds, stating that ‘[the] pension fund that invests in such
hedge funds in fact becomes responsible for corporate policy. That is a role that pension funds
should not aspire to in their role as investor’ (FNV, 2007, p.16).
Investment practices by Dutch funds were thus supported by a relative consensus among
business and union leaders on the desirability of employing pension capital for patient or
impatient usage. Both sides hoped to achieve high investment returns by allocating pension
capital to (what seemed at the time) high-performing asset classes, such as corporate equities
in the 1990s and alternative investments in the 2000s, predominantly outside the domestic
economy. Moreover, both business and labor actors explicitly rejected the idea of activist
ownership on the part of pension funds, instead preferring a more passive role as proxy-voting
shareholders. While almost all Dutch pension funds currently engage in proxy voting, only a
small minority employs part of its portfolio to realize social or environmental value: 10% of
funds invests in corporate equities for this reason, while a third invests in impact bonds (De
Kruif and Van Ipenburg 2015).
In the wake of the financial crisis, however, some shifts in the parties’ preferences can be
witnessed. Both the Rutte Administration and Dutch employers have called on pension funds
to invest in domestic investment projects, including real estate and infrastructure. Labor,
meanwhile, seems to have taken a more assertive stance on pension funds’ role as investor:
union federation FNV, for instance, is currently experimenting with the mobilization of pension
capital in support of union campaigns and has called for the divestment from ‘locust’ private
equity and hedge funds, whose aggressive short-term profit orientation jeopardize local
employment. However, as many pension funds are experiencing deteriorating financial
performance, profit orientation remains dominant.
6. Finland: From Long-Term Industrial Lending to Strategic Anchor Ownership
19
In the initial negotiations behind the TEL pension scheme in 1958–61, all main political parties
and central labor market organizations had agreed that the lack of long-term financial capital
was Finland’s main national economic challenge, which ought to be tackled with pension
capital (Niemelä, 1994). Only the preferred forms of the pension scheme and patient pension
capital varied. The main Finnish employer confederation regarded public ‘pension fund
socialism’ a major threat and was able to convince right-wing parties and some unions about
the benefits of a privately managed decentralized system. Thanks to the fragmentation and the
weakness of the political left, the main blue-collar central trade union organization, the SAK,
did not consider demands for public funds allocated to economically targeted investment
realistic, and focused on promoting a mandatory pension scheme. The compromise was a partly
funded social insurance scheme, whose investments were managed by different types of
privately owned special-purpose funds selected and governed by employers.
In order to get employers to cover full costs of the pension scheme, they were given a
right to borrow two thirds of paid contributions directly as cheap long-term loans without
collateral from pension insurance companies (PICs), or to use book reserves in a similar manner
in company and industry-wide funds. The government decided to constrain investment to the
asset classes it considered too risky with tight solvency requirements (Sorsa, 2011, pp. 140142). The demand for premium loans was overwhelming, accounting for about 50% of
investment portfolios until mid-1980s (Hannikainen and Vauhkonen, 2012, pp. 409). Other
investments consisted mostly of economically targeted investment loans guided by two policies
drafted jointly by the PICs and central labor market organizations (ibid., pp. 414). The first was
to prioritize investment targets that increase new, permanent jobs, enhance exports or
conditions for exports, and help to rationalize Finnish industrial or commercial activities or
improve the competitive position of Finnish businesses. The other one was that PICs could,
with discretion, invest in housing projects that would complement the maturing pension system.
20
In practice, the latter policy was never adopted apart from few investments in governmentbacked housing projects in the 1970s and 1980s (Sorsa, 2011).
There was a strong belief among the Finnish political and business elites in the late
1960s that premium and investment loans both promoted long-term real investment effectively.
However, the blue-collar labor unions saw premium loans as an inefficient way to promote
long-term investment, and called for major increase in economically targeted direct investment
in the early 1970s. Employers did not approve any changes in the premium lending mechanism,
but agreed to include representation of labor actors in the pension fund boards to avoid broader
negotiations. Labor unions saw this as an opportunity to promote long-term investment in the
future, as the volume of capital exceeding the demand for premium loans would become higher
as the scheme matured. (Niemelä, 1994.) Ever since, central labor market organizations have
become the main parties governing the scheme, including the design relevant laws and
regulations, and have been consensually united against all government attempts to meddle with
pension benefits (Kangas, 2007) or investment policy (Sorsa, 2011).
During the severe economic depression of the early 1990s, nearly 40 per cent of all
investment was allocated to Finnish government bonds to rescue the state from insolvency.
While seen as necessary at the time, this was inconsistent with the central labor market
organizations’ shared goal of enhancing private economic development. Awareness of the
potential costs caused by ageing population also started to emerge at the time, and cutting
pension costs became an overriding priority, as central labor market organizations considered
it a key factor sustaining the legitimacy of the pension scheme as well as their role in its
governance (Hannikainen and Vauhkonen, 2012). Financing needs also played a role in this
shift. The main employer association had called for more profitable investments that would
reduce contribution rates from mid-1970s onwards (Sorsa, 2011, pp. 142-143). The central
trade union organizations came to share this view in the early 1990s after the social partners
21
had agreed that the future contribution rate hikes should be split evenly between employers and
employees (Hannikainen and Vauhkonen, 2012, pp. 400-401).
The central labor market organizations started to negotiate major reforms to introduce
more profitable and internationally diversified portfolios in the mid-1990s, including changes
in investment regulation and pension fund governance after the collapse of one mismanaged
PIC, Eläke-Kansa. The central labor market organizations agreed that investments ought to be
more subjected to market discipline, and their governance and supervision to financial interests
of key stakeholders (Louekoski, 1996). The reform in investment rules promoted an equitydriven investment policy and required extensive diversification of equity portfolios
(Hannikainen and Vauhkonen, 2012, pp. 428-430). While the representation of unions in
pension fund boards was increased, the governance reforms of the 1990s gave the boards mostly
a supervisory and strategic role. This increased the independence of a new generation of more
short-term oriented portfolio managers recruited since the mid-1990s (see Sorsa, 2011). This
also resulted to more active trading practices. For example, the earnings-related pension funds’
purchasing and sales volumes of domestic equity rose continuously until 2007 in absolute terms
and in relation to overall assets, while pension funds have constantly increased their share of
overall trading volumes in the Finnish stock exchange (The Finnish Pension Alliance, 2016).
Patient capital also figured in the negotiations. In new conditions of open financial
markets, employers were afraid that their capacity to govern Finnish firms would be questioned
by impatient international capital, and strongly argued for the need of stable anchor owners that
would enable shield from hostile takeovers. The trade unions shared this view because they
believed that this was the best way to maintain the levels of domestic real investment
(Hannikainen and Vauhkonen, 2012, p. 428). In the 2000s, Finnish PICs have become anchor
owners occupying central positions in Finnish shareholder activism networks (Sorsa, 2013).
For example, the PIC Varma first purchased major stakes in telecom operator Elisa and later
22
sold them to the Finnish government to prevent hostile takeovers by Icelandic investors (Turun
Sanomat, 2008).
This development has not been without ambiguity. The solvency and investment rule
reforms of 2007 facilitated longer-term shareholdings, but those and later regulations also
significantly constrained the number and volume of strategic anchor ownership stakes (Sorsa,
2011). The various social responsibility and ownership policy norms adopted by the pensions
industry have been used to justify primarily symbolic ownership practices (Sorsa, 2013).
Similar ambiguity applies to economically targeted investment. In early 2000s, social partners
have discussed how real investment in Finland and in infrastructure investments could be
increased. Yet, the moment the actual negotiations on reforms to promote these goals started,
the entire theme was pushed aside and replaced with concerns of how the overall levels of
profitability and liquidity could be increased (Hannikainen and Vauhkonen, 2012, pp. 435–
436).
7. Conclusion
Our analysis confirms that pension fund investment is not inherently patient. Even though our
cases have different types of macro-level politico-economic institutions and pension systems,
they have demonstrated different mixes of patient and impatient forms of investment, whose
types and degrees vary over time. We agree with recent research suggesting that neither the
mixes nor the timing of their shifts can be explained adequately without addressing institutional
actors’ struggles over investment policies. Yet, our analysis suggests that the preferences of
institutional actors, in this case business and labor actors, cannot be attributed in an
unidirectional manner to macro-level institutional complementarities or pension liabilities.
Rather, preferences over im/patience are products of meso-level institutional dynamics. The
preferred uses of capital have shifted in from large-scale provision of long-term loans or
23
corporate bonds to volume-wise limited passive anchor ownership and modest, sometimes
symbolic, corporate engagement practices. We identified these preferences to be caused by
institutional pressures related to financing needs and capacities, governance capacities, and
regulative compliance. But these pressures are also the products of active institutional work
efforts to institute, maintain or disrupt some uses of pension capital.
In the United States, legislators imposed regulations that blocked labor attempts to use
investments in more patient ways leaving most funds to firms that were primarily concerned
with financing. This made the US occupational pension capital impatient early on and changed
the preferences of many unions. Only in funds in which practices of patient investment are not
clearly against the strong norms of fiduciary duty, or when unions have gained substantial
governance control (like in public funds and multi-employer funds), has patient pension fund
investment appeared. In the Netherlands, funds adopted a patient investment paradigm in form
of long-term bonds and loans from the early 1950s until the 1990s. Strong competition between
business and labor over the preferred forms of investment was absent, as both parties regarded
long-term bonds and loans as the preferred and appropriate form of pension investment. But
both parties also regarded impatient equity investment as the way to maintain control over the
pension system and passive anchor ownership as a way to increase corporate governance
capacities in the 1990s. In Finland, both employers and labor wanted to make pension capital
produced by the mandatory pension system patient early on, but in different forms. Due to a
favorable funding scheme generated by a political compromise, employers emerged as the
winners by getting a legally enforced right to long-term premium loans, and maintained their
preferred use of pension capital by compromising some of their governance capacity over
pension funds. Impatience was introduced by a joint effort by the increasingly aligned social
partners as a response to increasing financing needs and concerns over the legitimacy of
paritarian pension governance. They also introduce a new patient use of capital to shield Finnish
24
firms from hostile takeovers with passive anchor ownership, by both sets of institutional actors.
In contrast to the Netherlands, however, these developments also decreased governance
capacities of business and labor actors.
We suggest four avenues for further research. First, our study only addressed the
institutional factors and dynamics that define preferences over im/patience in context of
attempts to institutionalize them. Much more research is needed in order to identify preferences
that are not expressed in public and the causes of why some actors are able to realize their
preferences. Second, broader research, including comparative case studies, is needed to see if
our findings are more generalizable. It’s unlikely that the factors that we have identified are
exhaustive. Do they apply to other countries, pension schemes, or sources of capital? Do other
factors also shape investment preferences? We expect that similar findings over occupational
and mandatory earnings-related pensions can be made in a number of Western European
countries including Sweden, Denmark, and Germany. But other factors may be discovered in
these cases as well. Third, more detailed micro-level studies are needed in order to identify the
scope in which meso-level institutional changes influence micro-level practices. This requires
more ground-level views of the conditions under which investors change their preferences
about patient and impatient investment, and the more nuanced shifts within different asset
classes. Finally, more institutional actors – especially state actors and financial professionals –
and other types of pensions than occupational pensions need to be included in analysis in order
to understand how shifts in im/patience occur in different fields of pension provision and what
kind of mechanisms are involved in these broader processes.
25
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