Why do pension funds invest in risky assets?
European pension funds allocate about 40 percent of asset to equities. Stocks may increase the risk of the investment portfolio, but history has also shown that stocks yield higher returns. These higher expected returns are indispensable for pension funds to provide for adequate pensions at reasonable costs. A decrease in expected return by one percentage point would necessitate an increase in contribution rates of 35%. Or – were contribution rates to be kept at their existing levels – it would result in a decline of 35% in expected retirement benefits.
