Small Pension Funds Research Articles

Investigating the Efficiency of Indonesian Employee Pension Funds

This study aims to examine the performance of Indonesian employee pension funds based on technical and scale efficiencies. Our sample is 40 Indonesian pension funds in the 2011-2017 period, resulting in 280 firm-year observations. Data Envelopment Analysis (DEA) is used to measure pension funds’ efficiency levels. The results show Indonesian employee pension funds generally cannot operate efficiently. However, based on their size, large pension funds exhibit better technical efficiency levels than small pension funds. Conversely, small pension funds perform better in scale efficiency. Other findings document that, from the ownership perspective, state-owned enterprise (SOE) pension funds exhibit better technical efficiency levels than non-SOE ones. This study also proposes the managers of Indonesian employee pension need to improve their pension fund performance by reducing operational and investment costs and engaging in greater investment diversification.

Have scale effects on cost margins of pension fund investment portfolios disappeared?

ABSTRACT Investment costs of pension funds are crucial for their returns. Consolidation in the pension fund market proceeds continuously, often with cost savings as the main argument. Unused economies of scale in pension fund investment costs, however, have declined over the years to values close to zero, except for very small pension funds. This paper investigates investment economies of scale in the Netherlands and pays special attention to the non-linear relationship between investment costs and sizes of pension funds. Furthermore, investment cost margins are disaggregated into three cost types and into six asset categories. Performance fees are in particular paid for complex asset categories held by large pension funds. They reduce the traditional-scale economy results for the entire portfolio. Cost savings by consolidation is still possible but is very limited.

Have scale effects on cost margins of pension fund investment portfolios disappeared?

Investment costs of pension funds are crucial for their returns. Consolidation in the pension fund market proceeds continuously, often with cost savings as the main argument. Unused economies of scale in the pension fund investment costs, however, have declined over the years to values close to zero, except for the very small pension funds. This paper investigates investment economies of scale in the Netherlands and pays special attention to the non-linear relationship between investment costs and sizes of pension funds. Furthermore, investment cost margins are disaggregated into three cost types and into six asset categories. Performance fees are in particular paid for complex asset categories held by large pension funds. They reduce the traditional scale economy results for the entire portfolio. Cost savings by consolidation are still possible but are very limited.

Pension Fund Equity Performance: Herding Does Not Pay Off

I use proprietary data on equity holdings to show that Dutch pension funds herd in individual securities. I introduce a pension fund-level measure of herding that identifies the extent to which a pension fund follows other pension funds into and out of the same securities over time. I show that pension funds that herd underperform pension funds that do not herd by 1.32% on an annual basis that indicates herding has a negative impact on performance. Small pension funds and pension funds that trade less frequently are more likely to herd. These pension funds herd consistently over time, hence they appear to make this decision strategically out of reputational concerns.

AN EMPIRICAL STUDY ON PENSION FUNDS’ PORTFOLIO AND INVESTMENT PERFORMANCE: THE EFFECT OF PENSION FUNDS’ SIZE

This study seeks to investigate whether larger pension funds exhibit better investment performance than smaller ones and differences in the selection of investment instruments between large and small pension funds. Our research sample is 13 pension funds that are the members of BKS Dapen-KI (Badan Kerja Sama Dana Pensiun Kristen Indonesia – the Cooperation Council of Christian Pension Fund in Indonesia) in 2010-2017. We use the quantitatively descriptive and independent-sample t-test methods. The results indicate no significant difference between the performance of large and small pension funds likely because both pension fund types have relatively similar total assets. However, large and small pension funds have exhibit different investment instruments selection.

The emergence and performance of German REITs

PurposeGerman real estate investment trusts (REITs) are a small but important property investment vehicle in the European REIT landscape, offering German commercial property investment exposure in a liquid format, compared to the more property development-focused German listed property companies and the popular German open-ended property funds. The purpose of this paper is to assess the emergence of the German REIT market and the risk-adjusted performance and portfolio diversification benefits of German REITs in a mixed-asset portfolio over 2007-2015. The post-global financial crisis (GFC) recovery of German REITs is highlighted. Enabling strategies for the ongoing development of the German REIT market are also identified.Design/methodology/approachUsing monthly total returns, the risk-adjusted performance and portfolio diversification benefits of German REITs over 2007-2015 are assessed. Efficient frontier and asset allocation diagrams are used to assess the role of German REITs (and German property companies) in a mixed-asset portfolio. Sub-period analysis is used to assess the post-GFC recovery of German REITs.FindingsGerman REITs delivered lesser risk-adjusted returns compared to German stocks over 2007-2015, with limited portfolio diversification benefits. However, since the GFC, German REITs have delivered strong risk-adjusted returns, but with continued limited portfolio diversification benefits with German stocks. German REITs also out-performed German property companies. Importantly, this sees German REITs as strongly contributing to the German mixed-asset portfolio across the portfolio risk spectrum in the post-GFC environment.Practical implicationsGerman REITs are a small but important market at a local, European and global REIT level. The results highlight the major role of German REITs in a German mixed-asset portfolio in the post-GFC context. The strong risk-adjusted performance of German REITs compared to German stocks sees German REITs contributing to the mixed-asset portfolio across the portfolio risk spectrum. This is particularly important, as many investors (e.g. small pension funds) use German REITs (and German listed property companies) to obtain their German property exposure in a liquid format, as well as the increased importance of blended property portfolios of listed property and direct property.Originality/valueThis paper is the first published empirical research analysis of the risk-adjusted performance of German REITs, and the role of German REITs as a listed property vehicle in a mixed-asset portfolio. This research enables empirically validated, more informed and practical property investment decision making regarding the strategic role of German REITs in a portfolio.

Pricing an Accumulator with Continuous or Discrete Barrier

The low interest rate environment of recent years has sent many investors looking for ways to enhance returns. This has stimulated the creation of investment products with what were once known as “exotic” payoff patterns. These products tend to involve exposure to a risky security like a stock index, overlaid with a combination of guarantees and barriers designed to appeal to the target investor audience. Small investors, and many fiduciaries such as small pension funds, are rarely in a position to evaluate the highly path-dependent payoffs on such securities. In this article, the authors analyze a somewhat different product, the “accumulator” contract. This product is actually a formalized plan to build up a holding in some specific asset, typically a stock, through a series of purchases over time. In a typical example, the buyer commits to buy some number X of shares per day at a fixed price that is initially set below the current market price. If the market price subsequently falls below the contract price, the required purchase amount is doubled. But if the market price goes too far above the strike price, the contract terminates. The article presents valuation formulas for some standard variants and shows empirically that accumulator contracts are priced in the market at levels that tend to be quite favorable to the issuer.

The significance and performance of UK-REITs in a mixed-asset portfolio

Purpose UK-Real Estate Investment Trusts (REITs) are an important property investment vehicle, being the fourth largest REIT market globally. The purpose of this paper is to assess the significance, risk-adjusted performance and portfolio diversification benefits of UK-REITs in a mixed-asset portfolio over 2007−2014. The post-global financial crisis (GFC) recovery of UK-REITs is highlighted. Design/methodology/approach Using total monthly returns, the risk-adjusted performance and portfolio diversification benefits of UK-REITs over 2007–2014 are assessed. Efficient frontier and asset allocation diagrams are used to assess the role of UK-REITs in a mixed-asset portfolio. Sub-period analysis is used to assess the post-GFC recovery of UK-REITs. Findings UK-REITs delivered poor risk-adjusted returns compared to UK stocks over 2007–2014 with limited portfolio diversification benefits. However, since the GFC, UK-REITs have delivered strong risk-adjusted returns, but with continued limited portfolio diversification benefits with UK stocks. Importantly, this sees UK-REITs as strongly contributing to the UK mixed-asset portfolio across the portfolio risk spectrum in the post-GFC environment. Practical implications UK-REITs are a significant market at a European and global REIT level. The results highlight the major role of UK-REITs in a UK mixed-asset portfolio in the post-GFC context. The strong risk-adjusted performance of UK-REITs compared to UK stocks sees UK-REITs contributing to the mixed-asset portfolio across the portfolio risk spectrum. This is particularly important, as many investors (e.g. small pension funds, defined contribution [DC] funds) use UK-REITs to obtain their property exposure in a liquid format, as well as the increased importance of blended property portfolios of listed property and direct property. Originality/value This paper is the first published empirical research analysis of the risk-adjusted performance of UK-REITs and the role of UK-REITs in a mixed-asset portfolio. This research enables empirically validated, more informed and practical property investment decision-making regarding the strategic role of UK-REITs in a portfolio.

Is THEREAN OPTIMAL PENSION FUND SIZE? A SCALE‐ECONOMY ANALYSISOF ADMINISTRATIVE COSTS

ABSTRACTThis article investigates scale economies and the optimal scale of pension funds, estimating different cost functions with varying assumptions about the shape of the underlying average cost function: U‐shaped versus monotonically declining. Using unique data for Dutch pension funds over 1992–2009, we find that unused scale economies for both administrative activities are indeed large and concave, that is, huge for small pension funds and decreasing with pension fund size. We observe a clear optimal scale of around 40,000 participants during 1992–2000 (pointing to a U‐shaped average cost function), which increases in subsequent years to size above the largest pension fund, pointing to monotonically decreasing average costs. These model‐based outcomes are roughly in line with the results of a survivorship analysis.

Is There an Optimal Pension Fund Size? A Scale-Economy Analysis of Administrative and Investment Costs

This paper investigates scale economies and the optimal scale of pension funds, estimating different cost functions with varying assumptions about the shape of the underlying average cost function: Ushaped versus monotonically declining. Using unique data for Dutch pension funds over 1992-2009, we find that unused scale economies for both administrative and investment activities are indeed large and concave, that is, huge for small pension funds and decreasing with pension fund size. For administrative activities, we observe a clear optimal scale of around 40 thousand participants during 1992-2000 (pointing to a U shaped average cost function), which increases sharply in subsequent years to size above the largest pension fund, pointing to monotonically decreasing average costs. As regards investment costs we observe an optimal scale for total assets of around € 690 million and larger, without a clear shift over time and without diseconomies of scale for larger funds. The results are very sensitive to the correct functional form of the cost model. Consolidation among especially smaller and medium-sized pension funds would increase cost efficiency.

Is There an Optimal Pension Fund Size? A Scale-Economy Analysis of Administrative and Investment Costs

This paper investigates scale economies and the optimal scale of pension funds, estimating different cost functions with varying assumptions about the shape of the underlying average cost function: Ushaped versus monotonically declining. Using unique data for Dutch pension funds over 1992-2009, we find that unused scale economies for both administrative and investment activities are indeed large and concave, that is, huge for small pension funds and decreasing with pension fund size. For administrative activities, we observe a clear optimal scale of around 40 thousand participants during 1992-2000 (pointing to a U shaped average cost function), which increases sharply in subsequent years to size above the largest pension fund, pointing to monotonically decreasing average costs. As regards investment costs we observe an optimal scale for total assets of around € 690 million and larger, without a clear shift over time and without diseconomies of scale for larger funds. The results are very sensitive to the correct functional form of the cost model. Consolidation among especially smaller and medium-sized pension funds would increase cost efficiency.

Investor sophistication and risk taking

Using investment policy data of 857 Dutch pension funds during 1999–2006, we develop three indicators of investor sophistication. The indicators show that pension funds’ strategic portfolio choices are often based on coarse and less sophisticated approaches. First, most pension funds round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative, more complex asset classes, resulting in limited asset diversification. Third, many pension funds favor regional investments and as such do not fully employ the opportunities of international risk diversification. Our indicators are correlated with pension fund size, in line with the expectation that smaller pension funds are generally less sophisticated than large pension funds. Using the indicators for investor sophistication, we show that less sophisticated pension funds tend to opt for investment strategies with less risk.

Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model

This paper examines the impact of participants’ age distribution on the asset allocation of Dutch pension funds, using a unique data set of pension fund investment plans for 2007. Theory predicts a negative effect of age on (strategic) equity exposures. We observe that pension funds do indeed take the average age of their participants into account. However, the average age of active participants has been incorporated much more strongly in investment behaviour than the average ages of retired or dormant participants. This suggests that both employers and employees, who dominate pension fund boards, tend to show more interest in active participants. A one-year higher average age in active participants leads to a significant and robust reduction in the strategic equity exposure by around 0.5 percentage point. Larger pension funds show a stronger age-equity exposure effect than smaller pension funds. This age-dependent asset allocation of pension funds aligns with the original life-cycle model by which young workers should invest more in equity than older workers because of their larger human capital. Other factors, viz. fund size, funding ratio, and average pension wealth of participants, influence equity exposure positively and significantly, in line with theory. Pension plan type and pension fund type have no significant impact.

Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model

This paper examines the impact of participants’ age distribution on the asset allocation of Dutch pension funds, using a unique data set of pension fund investment plans for 2007. Theory predicts a negative effect of age on (strategic) equity exposures. We observe that pension funds do indeed take the average age of their participants into account. However, the average age of active participants has been incorporated much more strongly in investment behaviour than the average ages of retired or dormant participants. This suggests that both employers and employees, who dominate pension fund boards, tend to show more interest in active participants. A one-year higher average age in active participants leads to a significant and robust reduction in the strategic equity exposure by around 0.5 percentage point. Larger pension funds show a stronger age-equity exposure effect than smaller pension funds. This age-dependent asset allocation of pension funds aligns with the original life-cycle model by which young workers should invest more in equity than older workers because of their larger human capital. Other factors, viz. fund size, funding ratio, and average pension wealth of participants, influence equity exposure positively and significantly, in line with theory. Pension plan type and pension fund type have no significant impact.

Cost, performance and portfolio composition of small pension funds in Australia

AbstractCompared with large institutional pension funds, there is relatively little published research on small funds, which are defined in the Australian superannuation legislation as pension funds with less than five members. Small funds account for more than 20% of total pension assets and they are one of the fastest growing sectors and therefore play a significant part in the savings strategy for national retirement income. This paper contributes to the needed research by analysing the more granular audited accounting data collected for the subset of small funds regulated by the Australian Prudential Regulation Authority (APRA) over the last few years. The analysis provides new insights into the operating costs involved in running the funds, the investment performances and portfolio compositions of Small APRA Funds (SAF).

Pension Reform, Ownership Structure, and Corporate Governance: Evidence from a Natural Experiment

Sweden offers a unique natural experiment to analyze the microeconomic effects of institutionalized saving on ownership structure, corporate governance and performance of listed companies. First, the Swedish pension reform increased the participation of pension funds in the domestic stock market and caused a significant reshuffling in the ownership of the existing pension funds. Second, the availability of detailed data on firm ownership allows us to document the effects of the pension reform. We show that the effects of institutional investment on firm performance depend on the industry structure of pension funds. In particular, we find that firm valuation improves if large independent private pension funds and public pension funds increase their equity stakes in the firm, but not if smaller pension funds and pension funds related to financial institutions and industrial groups increase their shareholdings. Additionally, controlling shareholders appear reluctant to relinquish control and the control premium increases if public pension funds acquire shares.