Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment
38 Pages Posted: 22 Sep 2015 Last revised: 30 Sep 2017
Date Written: November 7, 2016
Concerned with excessive risk-taking, regulators worldwide generally prohibit performance-based fees in pension funds. Presumably, competition can substitute for incentive pay in providing incentives for fund managers to serve their clients’ interests. Using a regulatory experiment from Israel, we compare the performance of three exogenously-given long-term savings schemes: Funds with performance-based fees, facing no competition; funds with assets-under-management (AUM)-based fees and virtually no competition; and funds with AUM-based fees, operating in a competitive environment. Funds with performance-based fees exhibit the highest risk-adjusted returns without assuming more risk. Competitive pressure is not associated with similar outcomes, suggesting that incentives and competition are not substitutes in the retirement savings industry.
Keywords: Institutional Investors, Pension Funds, Incentive Fees, Defined Contribution
JEL Classification: G23, G20, G11
Suggested Citation: Suggested Citation