Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment

38 Pages Posted: 22 Sep 2015 Last revised: 30 Sep 2017

See all articles by Assaf Hamdani

Assaf Hamdani

Tel Aviv University; Buchman Faculty of Law; Coller School of Management; European Corporate Governance Institute (ECGI)

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Yevgeny Mugerman

Bar Ilan University

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2016

Abstract

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

Hamdani, Assaf and Kandel, Eugene and Mugerman, Yevgeny and Yafeh, Yishay, Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment (November 7, 2016). Journal of Law, Finance & Accounting, Vol. 2, No. 1, 2017, Available at SSRN: https://ssrn.com/abstract=2663323 or http://dx.doi.org/10.2139/ssrn.2663323

Assaf Hamdani

Tel Aviv University; Buchman Faculty of Law; Coller School of Management ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yevgeny Mugerman (Contact Author)

Bar Ilan University ( email )

Ramat Gan
5290002
Israel

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)

HOME PAGE: http://bschool.huji.ac.il/facultye/yafeh/

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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