The impact of agency costs on the investment performance of Australian pension funds

Abstract

This paper evaluates the overall investment performance of Australian pension funds by examining the determinants of risk-adjusted performance, and the relationship between risk, returns, and expenses. Using quarterly return data for 225 pension funds comprising 68% of total prudentially regulated pension fund assets, we find significant differences exist across fund types. On both a net return and risk-adjusted performance basis, not-for-profit funds significantly outperformed for-profit funds over the seven years to June 2002. We suggest that the performance difference is consistent with the hypothesis that agency costs in for-profit funds (due to non-representative trustee board structures and potential board member conflicts of interest) are greater than agency costs in not-for-profit funds (with representative trustee boards).

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