With Whom and in What is it Better to Save? Personal Pensions in the UK

Abstract

This paper studies the relationship between fund and provider characteristics, and fund performance using a sample of 4,197 U.K personal pension funds operated by 35 providers over a 30 years’ period (1980-2009). The fund performance is measured on an annual basis (short-term) and over the whole period of fund operation (long-term). We find substantial differences in which factors explain performance in the short- and long-run and whether the performance is measured against T-bills or against fund chosen prospectus benchmarks. Although big providers tend to perform better than their prospectus benchmarks on an annual basis, they underperform T-bills over the period of fund life. The provider’s extent of specialisation positively covaries with benchmark outperformance measured on an annual basis, but does not result in superior performance over funds’ operational life. In the long-run, fund performance is positively associated with market concentration and negatively with fund age. We also find that the timing of opening funds matters for their long-term returns, and, on average, funds lose more money during bear markets than they make during bull markets. Policy implications are discussed.

Keywords: pension funds, portfolio performance, Sharpe ratio, benchmark selection, portfolio risk

JEL Classification: G11, G18, G20, G23