Global (excluding US) pension fund performance

Pension fund performance describes the performance of pension fund managers, sampled worldwide. Pension funds are the funding mechanism for defined benefit plans, and in some countries are used as funding mechanisms for contributory retirement savings programs.

Comparison to mutual fund structure
The organizational structure of the pension fund industry is distinct from the mutual fund industry. In the mutual fund industry, retail investors directly allocate their own personal wealth to the mutual fund of their choice. In the pension fund industry, the employees of a corporation typically delegate investment choices to a corporate treasurer who then selects a pension fund.

This additional layer of delegation offers several benefits. Pooling the assets of many small investors allows treasurers greater negotiating power and monitoring capacity.

In addition, Del Guercio and Tkac (2002) provide evidence that corporate treasurers are more financially sophisticated than the average retail investor. Their greater financial sophistication may allow them to better identify skilled fund managers. However, delegation may also result in agency costs. Rational investors’ desire high risk adjusted returns, but treasurers may have a different objective.

On the other hand Bauer, Frehen, Lum, and Otten (2008), finding pension fund investment performance surpassing mutual fund performance, suggest that the return differential results from higher mutual fund agency costs.

Adonov, Bauer, and Cremers (2013) note that US public government defined pensions (unlike US corporate, Canadian and European defined pensions) are allowed by law to use the investment return rate as the discount rate for liability matching. This has led to both lower funding of pensions and the use of higher risk portfolios. The US public pensions have underperformed their more conservatively run counterparts by 0.60% per annum.

Pension funds have the following additional characteristics:
 * Unlike mutual funds, which are confronted with continual buying and selling of fund shares by individual investors, pension funds have investment flows defined by long term worker contributions and long term actuarial disbursements. The size of the fund is dependent on the size of the worker population the plan covers and the pension promises made to the workers.
 * Pension funds have, on average, lower expense ratios than average mutual fund expense ratios. Pension funds can manage investments internally at lower costs, or delegate investment funds to external managers of institutional funds. Most funds have both internally managed portfolios and externally delegated portfolios.

Descriptive statistics
According to a 2011 study, US defined benefit plans held 6.454 trillion dollars in 2010, representing 43% of US retirement pension plan assets.

The table below provides the mean strategic policy asset class weights for defined benefit plans over the period spanning 1990 - 2010. The asset class breakdown consists of equity, fixed income, cash and alternative assets. Alternative assets include investments in tactical asset allocation, commodities, natural resources, real estate, infrastructure, private equity and hedge funds.

The table below shows mean expense ratios for US defined pension plans over the 1990 - 2010 period. The mean all assets expense ratio rose over the span to an end of period average 0.55% due to an increase in the strategic allocation to alternative asset classes.

Andanov, Bauer, and Cremers (2012) find economy of scale to be advantageous in reducing costs: "...one standard deviation increase in the log of assets reduces the total investment costs by 7 basis points. The scale advantage is much more pronounced for alternative investments, where a one-unit increase in the log of alternative assets results in 111 basis points lower costs. As expected, funds managing a greater percent of their assets through active and external mandates have higher investment costs."

Performance
CEM Benchmarking Inc. is a Canadian based company which provides independent objective and actionable benchmarking information for large pools of capital including pension funds, endowments/foundations and sovereign wealth funds. Some studies utilize their data to provide insight into pension plan administration cost and service levels.