From Home Bias to Smart Investing: World Bank Maps Future of Pension Fund Strategy

The World Bank-led study finds that excessive domestic investment mandates can reduce pension fund performance and increase risk, while international diversification consistently improves long-term returns, stability, and resilience. It recommends that governments focus on strengthening governance, capital markets, and investible domestic opportunities rather than forcing pension funds to invest locally.

Pension funds worldwide may be missing significant opportunities to improve retirement outcomes because of excessive reliance on domestic investments, according to a new World Bank Group report prepared with contributions from Tilburg University, APG, and the International Center for Pension Management (ICPM). The study argues that governments, regulators, and pension fund managers should focus less on how much pension money stays at home and more on whether domestic investments can compete with global opportunities on risk, return, governance, and liquidity.

As pension assets continue to grow rapidly in many emerging and developing economies, the report warns that poorly designed domestic investment mandates could undermine retirement security while limiting the long-term development potential of pension systems.

Diversification Delivers Better Results

The report finds that home bias, the tendency of pension funds to invest heavily in domestic markets, remains widespread across both developed and developing countries. Pension funds in OECD economies invest a median 60% of their assets domestically, while funds in many emerging economies allocate around 80% to local markets. In some countries, domestic allocations exceed 95%.

However, simulations conducted across Canada, New Zealand, Norway, Mexico, Israel, Turkey, and Eurozone markets show that portfolios combining domestic and international assets consistently outperform purely domestic portfolios. Diversified portfolios generated higher long-term returns in six out of seven cases, reduced volatility in all cases, and provided stronger protection during periods of market stress.

The study also found that international assets often act as a natural hedge during domestic crises. Currency movements and global market performance frequently offset losses in local markets, helping stabilize pension portfolios. For pension funds, diversification is therefore not simply about earning higher returns; it is also about protecting retirement savings against economic shocks.

Why Governments Should Pay Attention

The report carries an important message for policymakers. As pension assets become larger relative to national economies, governments often view them as a source of funding for infrastructure, housing, and development projects. While pension capital can support economic growth, the report cautions against forcing funds into domestic investments that do not meet commercial standards.

Using an asset-liability management model, researchers estimated that a pension fund subject to a 70% minimum domestic investment requirement would suffer a 49% decline in risk-adjusted performance. The analysis identified an annual opportunity cost of 1.59 percentage points, with domestic investment restrictions accounting for 72% of the loss.

The findings suggest that pension savings should not be treated as a substitute for public financing. Excessive concentration in government bonds or politically driven projects can increase exposure to fiscal risks, reduce returns, and weaken long-term pension sustainability. Instead, governments should focus on improving investment conditions so that pension funds choose domestic opportunities because they are attractive, not because they are required.

New Opportunities for Development Partners and Investors

The report introduces the concept of the "Investible Window," a framework that determines whether an investment is suitable for pension capital. To qualify, an asset must offer competitive risk-adjusted returns, sufficient scale and liquidity, strong governance and legal protections, and an appropriate risk profile for long-term investors.

This framework creates a major opportunity for development finance institutions, multilateral banks, and donor agencies. Rather than encouraging pension funds to accept lower returns, development partners can help governments improve the quality of projects through technical assistance, project preparation support, blended finance structures, risk guarantees, and co-investment platforms.

Private-sector stakeholders also stand to benefit. Infrastructure developers, renewable energy companies, logistics operators, and asset managers can access growing pools of pension capital if projects meet institutional investment standards. Pension funds are increasingly looking for stable, long-term investments with predictable cash flows, transparent governance, and strong legal protections. Companies that can provide these characteristics may attract substantial institutional investment.

Governance Reforms Hold the Key

The report identifies governance as the most important factor determining whether pension funds can successfully balance domestic development objectives with fiduciary responsibilities. Countries with independent boards, professional investment teams, strong risk management systems, and clear fiduciary mandates are better positioned to make sound investment decisions.

For policymakers, the report recommends gradually reducing restrictive domestic investment quotas, strengthening capital markets, improving legal certainty, enhancing regulatory independence, and building pipelines of investible projects. For development partners, the priority should be helping countries move more assets into the investible window through market-building reforms. For private-sector stakeholders, the message is clear: attracting pension capital requires meeting institutional standards rather than relying on policy mandates.

The report concludes that pension funds should remain focused on their primary mission, delivering secure retirement incomes. At the same time, governments can unlock significant development benefits by creating investment environments where domestic projects naturally compete with global opportunities. In such a system, retirement security and economic development become complementary objectives rather than competing priorities.