Journal of Law, Finance, and Accounting > Vol 2 > Issue 1

Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment

Assaf Hamdani, The Hebrew University and ECGI, Israel, Eugene Kandel, The Hebrew University, CEPR and ECGI, Israel, Yevgeny Mugerman, The Hebrew University, Israel, Yishay Yafeh, The Hebrew University, CEPR and ECGI, Israel,
Suggested Citation
Assaf Hamdani, Eugene Kandel, Yevgeny Mugerman and Yishay Yafeh (2017), "Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment", Journal of Law, Finance, and Accounting: Vol. 2: No. 1, pp 49-86.

Publication Date: 06 Jun 2017
© 2017 A. Hamdani, E. Kandel, Y. Mugerman, and Y. Yafeh
Financial Markets: Financial Intermediation
Institutional InvestorsPension FundsIncentive FeesDefined Contribution


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In this article:
1. Introduction 
2. Related Literature 
3. Institutional Background, Data and Empirical Approach 
4. Data and Results 
5. Regulatory Solutions 
6. Concluding Remarks 


Concerned with excessive risk-taking, regulators worldwide generally prohibit performance-based fees in pension funds. Presumably, competition can substitute for incentive pay in providing incentives for fund managers to serve their clients’ interests. Using a regulatory experiment from Israel, we compare the performance of three exogenously-given long-term savings schemes: Funds with performance-based fees, facing no competition; funds with assetsunder- management (AUM)-based fees and virtually no competition; and funds with AUM-based fees, operating in a competitive environment. Funds with performance-based fees exhibit the highest risk-adjusted returns without assuming more risk. Competitive pressure is not associated with similar outcomes, suggesting that incentives and competition are not substitutes in the retirement savings industry.