Investment Option Switching Behaviour and Impact for Pension Fund Members Around the COVID Pandemic

Abstract

We study the switching of investment options by defined contribution pension fund members using a unique dataset provided by a large Australian superannuation fund that spans the market volatility associated with the COVID-19 pandemic. We find that both the magnitude and direction of switching activity is primarily related to market conditions but is moderated by member characteristics. Switching activity appears reactive to market movements, with a spike in defensive switches during the COVID-related market sell-off and other minor market downturns, and a majority of growth switches in other periods. Switching activity has a negative impact on the balances of members who switch, which appears associated with a tendency to chase returns and switch at inopportune times. Relating switches to member characteristics reveals a higher propensity for more engaged members to switch, members nearing retirement age to make defensive switches, males to make growth switches, and the starting portfolio position to influence the likely direction of switching. Our analysis can assist pension funds to formulate initiatives that may help prevent members from making detrimental switches.

Keywords: Pension funds, superannuation, investment switching, individual behaviour

JEL Classification: G11, G23, G41, G51, D14