Private pension fund flow, performance and cost relationship under frequent regulatory change

Published date01 February 2021
Date01 February 2021
Subject MatterAccounting & finance,Financial risk/company failure,Financial compliance/regulation
AuthorYaman Omer Erzurumlu,Idris Ucardag
Private pension fund ow,
performance and cost relationship
under frequent regulatory change
Yaman Omer Erzurumlu
Department of Engineering Management, Bahcesehir University,
Istanbul, Turkey, and
Idris Ucardag
Danfoss A/S, Istanbul, Turkey
Purpose This paper aims to investigate private pension fund investor sentiment against fund
performanceand cost in an environment of frequentregulatory changes. The analyses are conducted in a low
return, high-costprivate pension fund market environment, which makes it easier to observethe relationship
between investorsentiment to return and cost.
Design/methodology/approach This paper conducts xed effect, random effect and random effect
within between effectpanel data analyses of all Turkish private pension funds from 2011 to 2019. This paper
conductsthe analyses using aggregate data and subsets based on fund characteristicsand pre-post regulation
Findings When regulations provide compensation and improve market efciency in a pension fund
market, investor focus shifted from performance to cost. Investors allocated assets with respect to return
realization when adequately compensated for risk or had favorable cost contract clauses. Consequently,
investors in pension funds with lowerexpected returns and no special fee reduction clauses tended to adopt
the strategyof cost minimization.
Research limitations/implications The overlap of regulatory change periods could complicatethe
ability to distinguish the impactof any one specic change. The ndings therefore cannot be generalized to
differentlystructured markets.
Practical implications Regulatory changes could lead to a switch of investor objectives. When
regulatory changes compensate investors and increase market efciency, investors objective could switch
from performanceto cost.
Originality/value This study investigatesinvestor sentiment in a relatively young private pension fund
market, in which the relevant regulatorybody ambitiously implements frequent changes in regulation. The
selected market is unique in the sense thatit has negative real returns and high costs, which make investor
focus to returnand cost more readily apparent.
Keywords Private pension fund, Pension plan, Fund ow, Investor sentiment,
Active management return, Management fee, Financial regulation
Paper type Research paper
1. Introduction
Organisation for economic co-operation and development (OECD) countriespension plans
total asset size grew by 10% annually between the nancial crises of 2008 and the end of
2019, reaching an all-timehigh of US$32.2tn. As of December 2019, the total asset size of 5 of
JEL classication C23, G23, J32
Received14 March 2020
Revised9 August 2020
23November 2020
Accepted1 December 2020
Journalof Financial Regulation
Vol.29 No. 2, 2021
pp. 218-234
© Emerald Publishing Limited
DOI 10.1108/JFRC-03-2020-0028
The current issue and full text archive of this journal is available on Emerald Insight at:
the 35 OECD countries(Australia, Iceland, Netherlands, Switzerland and the USA) pension
funds exceed 100% of their gross domestic products (GDPs). A total of fteen countries
pension planstotal asset size to GDP ratio are above 20%, which is the threshold for a
OECD, 2020). As a result of this steady growth, interest among
various stakeholders in its underlying determinants and dynamics has been increasing. The
private pension system began in Turkey in 2003 and has developed consistently since its
commencement. By 2020, the total asset size under administration reached 3% of GDP (US
$21.3bn), surpassing the total size of the older mutual fund industry (US$14bn). The fraction of
private pension plans reached 47% of assets under dened benet and dened contribution
plans in total. Subsequent to the introduction of auto-enrollment in 2017 increased growth for
Turkish private pension market. Despite the decline in total assets for 12 of 65 OECD countries
in 2018, Turkish private pension fund market had the highest real growth rate of 20%. Yet, it
still has the fth lowest ratio of assets under management to GDP among OECD countries,
suggesting growth potential. As of 2020, the system is an auto-enrollment private pension plan
similar to those in the UK, Italy and New Zealand, and includes a cancellation option. Private
plans are all dened contribution plans and are not under government protection against
losses. Investors have the right to switch between management companies at no cost and are
permitted to rebalance their portfolios six times a year.
Our main motivation in choosing the Turkish market is not the rapid growth of assets
under management in the country. Rather, the countrys pension fund market presents a
unique case to study investorsentiment mainly for the following three reasons:
(1) signicant regulatory changes in a short period (just over ve years) that resemble
external shocks directly targeting investor behavior;
(2) frequent negative annual real returns (in four out of ten years); and
(3) stagnant high management fees (OECD, 2020).
The intention behind the regulatory changes seemed to increase participation and market
efciency. In 2013, the government started to compensate all private plans by adding 25%
of personal contributions to each account.In 2015, all plans were given access to all pension
funds through a Turkey electronic fund trading platform (TEFAS) system, which
signicantly led to a more efcient market affected the operational market efciency. In
2017, auto-enrollment with a termination option was introduced for those below the age of
Regulatory interference is a phenomenon seen in private pension markets in several
countries, such as the introductionof minimum return guarantees in Germany (Naczyk and
Hassel, 2019) or pension vesting and lock-in regulations to add protection to pensions in
Canada (Messacar, 2018).Sometimes, regulators attempt to balance the commercial viability
and social-politicalstability of the private pension provision, as in the UK (Tuytens, 2019). In
the context of the completion of the common nancial market and historically low real
interest rates, the recently founded European Insurance and Occupational Pensions
Authority has been assigned the task to develop a regulatory second regimefor private
pensions (Wolf and Wenzelburger, 2016). In some instances, the impact comes indirectly.
Regulatory changes in the public pension system affect the private pension system, a
phenomenon that has occurred in Italy (Nosi et al.,2017), or the combination of assets that
pension funds invest in general (Lebedeva et al., 2015).US public pension funds act on their
regulatory incentives and more often invest in risky assets to report better funding status
(Andonov et al., 2017). However, regulation studies are mainly limited to the impact of the
regulatory changes on the fund management or participation rate. One exception is Feng
pension fund

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