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

Author

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  • Hamdani, Assaf
  • Kandel, Eugene
  • Mugerman, Yevgeny
  • Yafeh, Yishay

Abstract

Concerned with excessive risk taking, regulators worldwide generally prohibit private pension funds from charging performance-based fees. Instead, the premise underlying the regulation of private pension schemes (and other retail-oriented funds) is that competition among fund managers should provide them with the incentives to make investment decisions that would serve their clients’ interests. We use a regulatory experiment from Israel to examine the effects of incentive fees and competition on the performance of retirement savings schemes. Taking advantage of a unique institutional setup, we compare three exogenously-given types of long-term savings schemes operated by the same management companies: (i) funds with performance-based fees, facing no competition; (ii) funds with AUM-based fees, facing minimal competitive pressure; and (iii) funds with AUM-based fees, operating in a highly competitive environment. We find that funds with performance-based fees exhibit high returns, possibly somewhat higher risk (depending on the measure used) and, in particular, high risk-adjusted returns. By contrast, we find no evidence that competitive pressure leads to improved performance. We conclude that incentives and competition are not perfect substitutes in the retirement savings industry. Our analysis also suggests that the pervasive regulatory restrictions on the use of performance-based fees in pension fund management may be costly and should be reconsidered.

Suggested Citation

  • Hamdani, Assaf & Kandel, Eugene & Mugerman, Yevgeny & Yafeh, Yishay, 2015. "Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment in Israel," CEPR Discussion Papers 10911, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10911
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    References listed on IDEAS

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    More about this item

    Keywords

    Competition; Incentives; Pension Funds; Retirement Savings;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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