US pension fund performance

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US pension fund performance describes the performance of pension fund managers. In the United States, pension funds are the funding mechanism for defined benefit plans, and include plans offered by both corporations and government agencies.

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 corporate pension fund industry, the employees of a corporation typically delegate investment choices to a corporate treasurer who then selects a pension fund.[1] This additional layer of delegation offers several benefits. Pooling the assets of many small investors allows treasurers greater negotiating power and monitoring capacity.[1] [note 1]

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.[1] However, delegation may also result in agency costs. Rational investors’ desire high risk adjusted returns, but treasurers may have a different objective.[1]

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.[2]

Government employees participate in public defined benefit plans managed by the sponsoring government.

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. [3]

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. [4]
  • 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

Fig. US pension plan asset allocation (1990 - 2010)[4]

According to a 2011 study, US defined benefit plans held 6.454 trillion dollars in 2010, representing 43% of US retirement pension plan assets. [5]

The average strategic policy asset class weights for defined benefit plans over the period spanning 1990 - 2010 (see figure) consists of 57.52% equity; 31.31% fixed income; 1.98% cash and 9.19% alternative assets. Alternative assets include investments in tactical asset allocation, commodities, natural resources, real estate, infrastructure, private equity and hedge funds. [4]

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. [4]

Andanov, Bauer, and Cremers (2012) find economy of scale to be advantageous in reducing costs:

" 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."

US defined plan expenses
Asset class Mean expense ratio (1990 -2010)
All assets 0.37%
Equity 0.33%
Domestic equity 0.29%
Fixed income 0.20%
Domestic fixed income 0.19%
Alternatives 1.33%


Unlike the history of US mutual fund performance studies, which is based on a great deal of available performance data, studies on defined benefit pension plan performance and persistence of performance have been hampered by the lack of available data. Most early studies examine the performance of externally managed institutional funds used by pension plans who delegate investment management to an outside fund. Later studies, using data from benchmarks provided by a Canadian based benchmarking firm (CEM Benchmarking Inc.),[note 2] examine the performance history of defined benefit plans.

US pension plan performance studies [note 3]
Study Data Source
Beebower and Bergstrom (1977) [1] Externally delegated portfolios
Brinson, Hood, and Beebower (1986) [2] Pension plan
Ippolito, and Turner (1987) [3] Pension plan
Lakonishok, Shleifer, and Vishny (1992) [4] Pension plan
Coggin, Fabozzi, and Rahman (1993) [5] Externally delegated portfolios
Busse, Goyal, and Wahal (2006) [6] Externally delegated portfolios
Bauer, Frehen, Lum, and Otten (2008) [7] Pension plan (CEM database)
Bauer, Cremers, Frehen (2010) [8] Pension plan (CEM database)
Dyck and Pomorski (2011) [9] Pension plan (CEM database)
Dyck, Lins, and Pomorski (2011) [10] Pension plan (CEM database)
Andonov, Bauer, and Cremers (2012) [11] Pension plan (CEM database)
Andonov, Eichholtz, Piet, and Kok, (2013) [12] Pension plan (CEM database)
Andonov, Bauer, and Cremers (2013) [13] Pension plan (CEM database)

Early studies

A survey of early studies follows:

Beebower and Bergstrom (1977)

This study was among the first to investigate the performance of delegated portfolios for defined benefit plans. The study examines 148 portfolios over the 1966 - 1975 period. Using a CAPM framework they found the average portfolio outperformed the S&P 500 index by 1.44% per year along with a pattern of performance persistence.

Brinson, Hood, and Beebower (1986)

The study examines the returns of 91 defined benefit plans during 1974-1983. Benchmarked against the S&P 500, these plans underperformed by 110 basis points per year and showed no evidence of superior security selection or market timing persistence.

Ippolito and Turner (1987)

This study investigates a sample of 1,526 plans during 1977-1983 and finds that the average plan underperformed the S&P 500 in a CAPM framework by 44 basis points per year but outperformed a weighted stock-bond index by approximately 38 basis points.

Lakonishok, Shleifer, and Vishny (1992)

The study examines the performance of 341 investment management firms between 1983 and 1989. They find that the firms underperformed the S&P 500 by 260 basis points per year, and acknowledge that although some evidence of persistence exists, data limitations prevent a robust conclusion.

Coggin, Fabozzi, and Rahman (1993)

This study revisits the Brinson, Hood, and Beebower (1986) study, and documents positive selectivity and negative timing skills for a random sample of 71 equity managers from US pension plans.

Busse, Goyal, and Wahal (2006)

This expansive study examines the performance and persistence in performance of 4,617 active domestic equity institutional products managed by 1,448 investment management firms between 1991 and 2008. Controlling for the Fama–French (1993) three factors and momentum, aggregate and average estimates of alphas are statistically indistinguishable from zero. They find only modest evidence of persistence in three-factor models and little to none in four-factor models.

Studies using the CEM database

The CEM database allows academics to study the performance metrics of individual defined benefit plans.

Andonov, Bauer, and Cremers (2012)

The study examines defined benefit plan performance over the 1990–2010 period. The CEM database includes a total of 557 U.S. pension funds which account for approximately 30-40% of the asset under management by U.S. pension funds. In 2010, the holdings in U.S. equity of U.S. pension funds included in the CEM universe represent 4.2% of the market capitalization of the NYSE, NASDAQ and AMEX and their fixed income holdings are equal to about 2% of the total outstanding U.S. bond market debt.

The study measures plan performance in terms of asset allocation policy, market timing, and security selection. Over the 1990 - 2010 period, the average pension plan provided an annual excess return of 89 basis points after risk adjusting for equity, market, size, value, liquidity, and fixed income market factors. The distribution of excess return breaks down as follows:

  • Asset allocation. The average plan produced 25 basis points of excess annual return by setting asset allocation. Most of this excess return is attributable to an increase in alternative asset class allocation over the period. Plans also increased allocations to international stocks over the period.
  • Market timing. The average plan reaped 26 basis points of excess return due to passive exposure to time-series momentum.
  • Security selection. The average plan received 25 basis points of excess return from security selection. However, this return becomes insignificant after controlling for risk factors and is attributable to the momentum in equity markets.

The study finds that large plans, while having lower costs than smaller plans, face liquidity constraints due to size, as well as potential organizational issues that introduce agency issues which can reduce returns.

The study concludes:

"Overall, pension funds seem to have most expertise in designing strategic asset allocation and market timing policies, rather than in actively selecting securities or in finding external managers with superior security selection skills.

Pension funds benefit significantly from time series momentum across multiple asset classes. Our results thus suggest that pension funds, and especially the larger funds, would have done better if they invested in passive mandates without frequent rebalancing across asset classes. This conclusion is confirmed when we compare the total performance of funds depending on the percentage of their assets that is actively managed. The most actively managed group of pension funds has significantly greater liquidity-related diseconomies of scale, as its funds that are in the largest quartile group underperform similarly sized funds with much less active management by about 62 basis points a year.

Our paper thus documents three separate reasons for the attractiveness of passive management, especially for the largest pension funds. First, pension funds on average had insignificant risk-adjusted security selection performance. Second, passive management is much cheaper than active management. Third, performance in passive mandates is less subject to liquidity-related diseconomies of scale."

Bauer, Cremers, Frehen (2010)

The study finds that pension fund costs are substantially lower than mutual fund fees. The domestic equity investments of US pension funds tend to generate abnormal returns (after expenses and trading costs) close to zero or slightly positive. Small cap mandates of defined benefit funds have outperformed their benchmarks by about 3% a year. The study authors note:

"While larger scale brings costs advantages, liquidity limitations seem to allow only smaller funds, and especially small cap mandates, to outperform their benchmarks."

Alternative asset classes

The most prevalent alternative asset classes used by pension plans are real estate investments, private equity, and hedge funds. As the table below indicates, pension funds began investing in hedge funds in 2000 and the percentage of funds using hedge funds has increased over the 2000 - 2008 period. The average allocation to real estate, private equity, and hedge funds has remained fairly consistent over the period.

Alternative asset allocation [6]
2000 2001 2002 2003 2004 2005 2006 2007 2008
No. of Pension Funds 221 228 215 210 223 207 206 230 236
% investing in hedge funds 1.35 3.94 6.97 9.52 11.65 15.94 21.35 24.78 25.42
Average allocation 5.01 5.60 4.41 2.19 3.13 4.77 4.52 4.89 5.47
% investing in real assets 69.68 65.78 65.58 67.61 72.74 72.46 72.81 74.78 78.81
Average allocation 4.00 5.06 5.46 5.24 4.84 5.25 6.01 6.63 7.70
% investing in private equity 51.13 50.00 50.23 52.85 52.91 55.07 56.79 61.73 63.98
Average allocation 4.07 4.52 4.13 4.23 3.94 3.71 3.74 4.71 6.13
Andonov, Eichholtz, Piet, and Kok, (2013)

This study evaluates the allocation and performance of pension fund investments in real estate, the most significant alternative asset class for institutional investors. Investments in real estate can include direct investment, investment in equity REITS, or take place through fund of funds for direct investment. Real estate investments can be managed internally or delegated to outside investment managers. Real estate investment cost and performance are determined by two main factors: mandate size and investment approach. For example, internally managed versus externally managed assets produced the following costs over the period:

  • Internal management expenses: median 18.51; mean 26.24
  • External management expenses: median 76.35; mean 86.08

Interestingly, US pension fund real estate costs are higher than the real estate costs incurred by Canadian, European, and Pacific pension plans. Cost breakdowns are tabulated below:

Costs in basis points
Region Median Mean
All funds 67.24 76.19
U.S. 83.48 91.12
Canada 44.97 55.54
Europe 30.31 37.62
Aus/Nzd 42.90 44.82
Subcategory Median Mean
REITs 32.75 41.45
>Internal approach 8.35 12.06
>External approach 52.61 62.75
Direct real estate 72.47 82.89
>Internal approach 22.81 31.40
>External approach 78.52 88.09
Limited partnership 122.58 143.15
Fund-of-funds 170.70 182.56

Real estate portfolios produced the following returns. The study authors conclude:

Larger pension funds are more likely to invest in real estate internally, have lower costs, and higher net returns. Smaller pension funds invest primarily in direct real estate through external managers and fund-of-funds, and disregard listed property companies. Overall, delegating real estate investment management to financial intermediaries increases costs and disproportionally reduces returns.

US pension fund Real Estate net returns vs. benchmark
1990-2009 time period (for fund-of-funds 1995-2009)
All RE Assets -1.27%
REITs 0.56%
Direct RE -1.43%
Internal management 0.21%
External management -1.29%
Fund of funds -3.76%


  1. Refer to the following studies for further investigation of agency issues:
  2. 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.
  3. US pension studies:

See also


  1. 1.0 1.1 1.2 1.3 Jame, Russell E., '"Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds" (January 22, 2010). Available at SSRN. Viewed Jan 02, 2014.
  2. Bauer, Rob, Frehen, Rik, Lum, Hubert and Otten, Roger, "The Performance of US Pension Funds New Insights into the Agency Costs Debate" (November 2008)
  3. Andonov, Aleksandar and Bauer, Rob and Cremers, Martijn, "Pension Fund Asset Allocation and Liability Discount Rates: Camouflage and Reckless Risk Taking by U.S. Public Plans?" (May 1, 2013). Available at SSRN.
  4. 4.0 4.1 4.2 4.3 Andonov, Aleksandar and Bauer, Rob and Cremers, Martijn, "Can Large Pension Funds Beat the Market? Asset Allocation, Market Timing, Security Selection and the Limits of Liquidity" (October 2012). Available at SSRN.
  5. "Global Pension Asset Study 2011", Towers Watson. Viewed Jan. 2 2014
  6. Bouvatier, Vincent and Rigot, Sandra, '"Pension Funds' Allocations to Hedge Funds: An Empirical Analysis of U.S. and Canadian Defined Benefit Plans" (September 25, 2012). Available at SSRN.

External links