The pension fund industry affects an enormous proportion of the world population and consists of more than $20 trillion of assets globally. Hence the performance of pension funds has major effects. This thesis investigates the performance of personal pension funds in the UK, one of the leading pension industries in the world. It identifies two important factors that are largely overlooked in the related literature: fund’s age and management outsourcing. Based on the ‘career concerns’ argument by Holmström (1999), it tests whether fund performance is age dependent, and in particular, whether funds perform better when they are young than when they ‘mature’. Moreover, one of the major features of the pension fund industry has been the enormous growth in management outsourcing. This thesis addresses this issue and tests whether there are differences in the performance between outsourced and internally managed funds, and investigates potential determinants of the decision to outsource. It argues that a ‘fashion to outsource’ may be partially responsible for the trend.
Given that a CAPM-APT based analysis is not appropriate for the data at hand, the thesis employs three alternative performance measures, two of which utilise fund-specific benchmarks. The results show that risk-adjusted returns are statistically insignificantly different from zero but funds significantly outperform their benchmarks. Performance is found to change with fund’s age but this relationship is more complex than a simple ‘career-concern’ argument would predict. Risk-adjusted returns of the internally managed and the outsourced funds are both indifferent from zero but the outsourced funds are better at outperforming their benchmarks. Lastly, there is some evidence of a ‘fashion to outsource’.
This research is novel in several ways. It provides the first detailed investigation of the performance of the UK personal pension funds. It is the first to address the question of potential factors (other than managerial characteristics) that may explain fund performance. It discusses the rise of outsourcing in the industry and analyses differences/similarities between performance of the outsourced and the internal funds. Finally, it is the first to investigate whether the rapid increase in outsourcing is due to ‘fashion’.
|Date of Award
|30 Jun 2012
|Anna Zalewska (Supervisor) & Steve Brammer (Supervisor)
- pension funds
- career concerns