Do Pension Funds Manage Cash Efficiently?

Abstract

Using unexplored data on Swiss pension funds, we study whether pension funds manage their cash efficiently. While a share of cash is held to meet certain operational and investment needs, the remaining is accumulated from past activity and slowly invested. Most of the variation observed in pension fund cash holdings is, however, attributable to pension fund-specific time-invariant factors rather than to differences in pension funds’ needs. We estimate that pension funds with excessive cash holdings hold an average of 8.4% of total assets in excess cash. Investing this excess cash in a representative portfolio of assets could translate into an additional expected annual return of 30 basis points. Furthermore, we show that pension funds in a deccumulation phase, as well as large pension funds, are more efficient in managing their cash and that the introduction of negative interest rates by the Swiss National Bank triggered a systematic reduction in pension fund cash holdings.