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

40 Pages Posted: 4 Nov 2015

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 2015

Abstract

Regulators worldwide take the view that competition - and not performance-based fees - should play a dominant role in aligning the interests of retirement savings fund managers with those of their clients. We use a regulatory experiment from Israel to examine the effects of incentive fees and competition on performance. Taking advantage of a unique institutional setup, we compare three exogenously-given types of retirement savings funds operated by the same management companies: (i) funds where fees are performance-based; (ii) funds where fees are based on assets under management (AUM) operating in an environment with very weak competitive pressures; and (iii) funds where fees are AUM-based and the environment is highly competitive. We find that funds with performance-based fees exhibit high returns, high risk and high α. By contrast, when comparing the average performance of funds with AUM-based fees in competitive and less competitive environments, we find no significant differences (except that funds in a competitive environment charge lower fees). We conclude that incentives and competition are not perfect substitutes in the retirement savings industry. We also conjecture that the ubiquitous regulatory restrictions on the use of incentives in fund management may be inefficient, and should perhaps be reconsidered.

Keywords: Competition, Incentives, Pension Funds, Retirement Savings

JEL Classification: G23, G28, G38

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 in Israel (November 2015). CEPR Discussion Paper No. DP10911, Available at SSRN: https://ssrn.com/abstract=2685648

Assaf Hamdani (Contact Author)

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

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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