The Economics of Pension Fund Management

doi:10.2469/faj.v50.n6.21

Keith P. Ambachtsheer

No profession can have legitimacy without accountability. For pension fund managers, accountability means being able to demonstrate that they know their mission and that they pursue it with diligence and skill. Only recently has a generally accepted approach for pension fund managers to do this emerged. This article describes the approach and reports research results based on an asset pool comprising 184 pension funds aggregating to almost $1 trillion. Differences in investment policy do indeed have a significant impact in explaining differences in fund returns. Thus, raw fund returns are too noisy to be subjected to comparative measurement. Factors such as fund size, management mode, and type of sponsor do not explain differences in policy-adjusted returns in a significant, consistent manner. Systematic factors explain 60 percent of the variance in fund operating costs. For the 76 funds with continuous 1991- 93 three-year histories, each incremental unit of discretionary operating costs produced an average three units of incremental return. The relationship was of only marginal statistical significance, however. It remains to be seen whether this positive value-cost relationship will persist in the future.

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