The Four Ways Through Which Pension Funds Increase the Productivity of Firms They Invest In

This white paper is the outcome of a Working Group formed by the International Centre for Pension Management (ICPM). The Working Group, which consists of academic researchers and senior officials of large pension funds active in different parts of the world, investigated the channels through which pension funds as long-term investors are able to generate productivity gains in the firms they invest in.

Key findings from the white paper are summarized below:

• Recent research based on Danish data has found that investments made by pension funds increase the productivity of the firms they invest in by, on average, between 3% and 5% (Beetsma, Jensen, Pozzoli and Pinkus 2023).
• The productivity effect is larger when the equity stake is larger and is held for a longer period. It is also more concentrated among the non-listed and smaller firms.
• The positive productivity effect raises the firm’s value. If the valuation benefit outweighs the cost of selection and engagement with the investee, the pension fund would benefit from the deal.
• The four primary channels promoting this productivity effect are the supply of funds channel, the long-term commitment channel, the engagement channel, and the signalling channel.
• Several real-world cases of pension fund investments described in the white paper corroborate the role of the above channels. The case studies demonstrate that multiple channels often operate at the same time and mutually reinforce each other.
• No role is found for selection effects in the productivity estimates. However, pension funds do not randomly select investees. They select firms that have the potential to generate productivity gains but cannot achieve those gains without the pension fund’s help.
• The findings of the white paper suggest that the aggregate economy can benefit from governments stimulating funded pension provision and providing (regulatory) incentives for pension funds to engage in long-term investments in firms that benefit from the abovementioned channels.