Patience and Impatience in Retirement Capital: American, Dutch, and Finnish Occupational Pension Systems Compared Michael A. McCarthy Marquette University Ville-Pekka Sorsa Hanken School of Economics Natascha van der Zwan Leiden University

Background Varieties of Capitalism literature: time horizon of capital is one of the most significant determinants of variation between different types of capitalism – The ’electronic herd’ of equity, hedge funds etc. in LMEs vs. the inherently ’patient’ capital of banks, family ownership etc. in CMEs Recent critiques: – No investor is inherently ’patient’ or ’impatient’, all investors can have both types of investment (e.g. banks in CMEs) – Different kinds of (institutional) investors can take the role of patient capital (Dixon) – Time horizons adopted by institutional investors depend on the interests of different societal actors (Naczyk)

Research agenda: varieties of pension fund capitalism compared When, how and why do pension funds become more ‘patient’ or ‘impatient’ (in the different meanings of the term)? Pension funds relevant for testing whether institutional investors are inherently patient or not – Pension capital exists in LMEs as well as CMEs, much institutional variation between and within different MEs – Pensions are at the frontier of financialization Comparative case study on occupational pensions in the United States, the Netherlands and Finland from post-war years until today

Patient vs. impatient pension capital ContextForms of patienceForms of impatience Investment styleLong holding periods and low turnover rates Short holding periods and high turnover rates Financial instrumentsAssets seeking profit from long- term deals and the ’back end’ of projects (e.g. long-term corporate bonds) Economically targeted investment (e.g. housing, infrastructure) Short-term profit maximization or risk optimization (e.g. hedge funds) MPT: all asset classes treated with same criteria Strategic relationships between investors and management Loyalty / ’working capital’ Voice / ’anchor ownership’ or shareholder activism Exit / divestment

Theoretical framework Three institutional arenas shaping investors’ time horizons: – Professional norms of finance – Financial regulation – Collective bargaining These institutions are analyzed as arenas in which states, firms and labour can pursue their interest The three cases differ significantly in terms of applicable and prevalent professional norms, forms of regulation, and collective bargaining systems – and institutional design of pension schemes

Main findings Increasing impatience over time in all three cases – but thanks to different institutional mechanisms Employers have been able to pursue their interest most effectively thanks to – financial regulation in the US & Finland (fear of pension fund socialism) – consent of labour in the NL & Finland (search for higher profitability) Shift in patient investment from bond-based ’working capital’ to shareholder activism and/or anchor ownership

Investment styleTypes of financial instruments Governance e.g. long holding periods, low turnover rates e.g. long-term bonds or loans e.g. economically targeted investment e.g. anchor ownership, shareholder engagement, proxy voting United States No reliable data available. Prior to 1960s: US securities and bonds. Since mid- 1960s: corporate equity Limited Multi-employer funds more involved in proxy voting and shareholder engagement Netherlands Limited data available. Prior to 1990s: bonds and loans. After 1990: corporate equity Limited Since 1990s, proxy voting and shareholder engagement Finland Limited data available. Long- term bonds (usually 10 years) dominant until 1980s Until mid-1990s: premium loans and long-term bonds. Highly diversified after late 1990s “Investment loans” until 1980s Domestic anchor ownership since late 1990s.

United States Financial regulation: – Taft-Hartley Act (1947): employer administration of funds – Employee Retirement Income Security Act (1974): prudent person rule Labor-management relations: – Single-employer funds: investment in own stock – Multi-employer funds: more targeted investment Professional norms: – Modern portfolio theory predates ERISA

Netherlands Government regulation: – 1952 Pension and Savings Funds Act: solid investment rule – 2007 Pension Act: prudent person rule – But: solvency rules! Labor-management relations: – Joint administration of pension funds – Employers: more equity investments to reduce costs – Unions: reluctant agreement Professional norms: – Modern portfolio theory but also adoption ESG-criteria

Finland Nation-wide earnings-related pension scheme for private sector workers (mandatory, DB, partly funded, privately managed, decentralized with competition) Financial regulation: – Tight solvency rules blocking equity investment (-1997) – Premium loan mechanism – Polarization of impatience since 2006 Labor-management relations: – Joint administration of pension funds, but more strategic supervisory role since 1997 – empowered prevailing professional norms – More profitable and more broadly diversified investment to reduce costs since mid-1990s Professional norms: – Separate norms from the financial industry – ETI-prized until 1980s, social responsibility norms in the 2000s – Replacement of investment staff in early 1990s

Conclusions Pension funds are not inherently patient or impatient In all three cases, pension capital is increasingly impatient but also polarized The main forms of patience adopted since the 1990s – anchor ownership and shareholder activism – are highly compatible with MPT Institutional explanations for the dominant time horizons of pension capital vary Further research needed: – Holding periods and turnover rates of PFs in different economies – The effects of pension plan design and organizational form of PFs to time horizons – A similar analysis on other institutional investors!