Private pension funds: passivity at active fund prices

Abstract

From 2005 to 2015, the total assets managed by open private pension funds increased more than six times in Brazil, where the Free Bene t Generating Plan (PGBL) and the Free Bene t Generating Life (VGBL) represent 90% of these assets. However, private pension institutions are characterized by the collection of high management fees, thus keeping for themselves much of the bene ts o ered by the government as incentive for investment in this modality. High management fees are justi ed only when there is active management of these funds, theoretically generating higher performance: this study indicates that this is not the case in this market segment. Similar problems have been faced in other countries, such as the United Kingdom, Denmark, and Sweden, which led investigation concerning funds that charge high management fees for active management, while they actually provide management that may be regarded as passive. is demonstrates the scale and relevance of this issue, which has been surveyed and addressed by this study. To do this, dynamic style analysis was performed, through rolling regressions, followed by Kalman lter analysis in funds from the top-ve private pension institutions in Brazil. Analyzing the exposure evolution of these funds to various asset classes and the R 2 generated, passivity traces were found, mainly in composite variable income funds. Such funds are precisely those that should be more actively managed, as they charge the highest management fees. is article also demonstrates it is possible to build a passive portfolio, having a very similar style and returns without statistically signi cant di erences, but at a lower management fee (and aligned with passive funds).

Performance of retirement funds: An analysis focused on pure insurance companies,

“…PGBL and VGBL funds (FIE) are usually classified in three categories: conservative, moderate, and aggressive, as according to Campani and Brito (2018). Conservative funds only invest in fixed income instruments, moderate funds area allowed to invest 15-30% (depending on the institution) in stocks, and aggressive funds could invest up to 49% in stocks (in the time period analyzed by this study, because new funds launched after November 2015 were allowed to invest up to 70% in stocks).…”

“…The weights that compose the benchmark for aggressive funds were determined based on the work of Campani and Brito (2018). The paper demonstrates that, although aggressive funds were allowed to invest up to 49% in variable income products, on average, the investments were closer to 40%.…”

“…These plans are PBGL, VGBL, and the traditional plans (which are old-fashioned nowadays and difficult to find). PGBL and VGBL plans have become very popular, and they currently account for more than 90% of the sector, as according to Campani and Brito (2018). Moreover, FenaPrevi (2017b) indicated that almost all the new contracts issued are about just PGBL and VGBL products (99.4% in October 2017).…”

“…Higher fees are charged under the assumption of active management and potential superior performance. In order to check whether or not PBGL and VGBL funds are active managed, Campani and Brito (2018) performed a dynamic style analysis to find out that this was not the case with such funds; in other words, high fees were not justifiable. The passivity presented by the funds analyzed (all of them managed by institutions linked to a retail bank) was shown to be such that, with a very simple strategy, anyone could obtain, at least, the same performance, but with lower fees.…”

“…The purpose of this paper is to compare the performance of PGBL/VGBL retirement funds, differentiating PICs from companies linked to large retail banks. Campani and Brito (2018) evaluated the performance of PGBL/VGBL retirement funds from the largest five institutions, but all of them linked to large retail banks. On their turns, Amaral (2013) and Medeiros (2015) compared performances of PGBL/VGBL funds with standard investment funds, not differentiating funds managed by PICs and focusing on returns and volatilities.…”