Study: “Bigger Is Better When It Comes to Pension Plans”

In a recent Canadian academic paper, researchers assert that larger pension plans outperform their smaller peers due to asset allocation, internal management, and governance.

(September 9, 2011) – Larger pension plans such as Ontario Teachers’ and the New York State Common Retirement Fund are more likely than their smaller peers to provide better investment returns, recent academic work from University of Toronto researchers Alexander Dyck and Lukasz Pomorski shows.

Unlike mutual funds, the authors argue in the paper, pension funds increase in performance as their size grows. “First and most strikingly, we find increasing returns to scale for pension plans,” the authors conclude. “Bigger is better when it comes to pension plans. Larger plans outperform smaller plans by 43-50 basis points per year in terms of their net abnormal returns.

This is partially the result of a greater preference for internal management of assets at larger plans, the authors conclude. “While delivering similar gross returns, external active management is at least [three] times more expensive than internal active management, and in alternatives it is [five] times more expensive,” they write.

Large plans also outperform because of asset allocation decisions unique to them, the authors write. “We find that larger plans shift towards asset classes where scale and negotiating power matter most and obtain superior performance in these asset classes,” they assert. “Larger plans devote significantly more assets to alternatives, where costs are high and where there is substantial variation in costs across plans.” Real estate and private equity add the most value, they insist.

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Governance issues also influence returns, the study shows. “Finally, we present suggestive evidence that plan governance affects performance and the ability to fight scale diseconomies,” the authors write. “Long standing concerns about plan governance…are likely greater in the public than in the private sector, particularly where public plans have severe limits on pay for internal managers …We find that stronger governance provides higher returns and a greater ability to take advantage of scale economies.”

The data on which the study is based comes from CEM Benchmarking, the well-known Canadian pension benchmarking company.

For a look at the world’s largest asset owners – including the world’s largest defined benefit pension plans – go to aiCIO’s recently launched interactive database, the aiGlobal 500, here.



To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

CFTC to Delay Dodd-Frank Swap Rules

The Commodity Futures Trading Commission (CFTC) will delay some votes on Dodd-Frank swap rules until 2012.

(September 8, 2011) — The Commodity Futures Trading Commission (CFTC) has delayed some votes on Dodd-Frank rules for the $600 trillion derivatives market until 2012.

“The realities of this schedule will push the clearing and trading mandate to approximately the third quarter of 2012,” Scott O’Malia, Republican commissioner, said Thursday.

CFTC Chairman Gary Gensler added that several major new rules for the over-the-counter derivatives market will include rules on how much cash companies need to set aside to guard against losses on derivatives bets. The delay marks the second time that the agency has needed additional time to finalize rules to reduce risk and heighten transparency in the swaps market. In June, the agency said it would miss deadlines to finalize several new derivatives rules.

In April, as part of the Dodd-Frank law, financial regulators approved a 300-page proposal to define a new swaps plan to explain which agency — the Securities and Exchange Commission or the Commodity Futures Trading Commission — will regulate what types of transactions. The proposals provided the market with increased clarity, as regulators have faced scrutiny and mounting criticism for not acting on the swaps definitions rule sooner.

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Under the proposals — aimed at limiting risk and boosting transparency in the global swaps market — swaps include foreign exchange swaps and forwards, foreign currency options, commodity options, cross-currency swaps, and forward rate agreements. An exemption would apply to certain insurance products, consumer and commercial transactions.

President Obama signed the Dodd-Frank financial regulation bill last July, giving the CFTC and SEC oversight of the OTC derivatives market while forcing most swaps to be cleared on a regulated exchange. Obama’s signature marked a legislative push that has become increasingly aggressive since the 2008 financial crisis pummeled the US economy.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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