DP19286 Performance Capital Flows in DC Pensions
Are defined contribution (DC) pension funds capital flows sensitive to performance? In many countries, employees have the discretion to choose and switch their pension managers. However, given the widespread evidence on inertia in individual household financial choice, the answer is not clear. Using novel data on retirement accounts for nearly 10 million individuals, we look at the employee pension-manager switching behavior conditional on plan risk-profile. We see that switching across managers even within the same pension product is not uncommon, and switching propensity increases over time. We also show that these capital flows across managers are sensitive to and convex in fund performance. This account flow to performance sensitivity is an important pressure that is tied to managers incentives and portfolio allocation. Relatedly, we find that an increase in competitive pressure among pension providers is conducive to shift to higher-yielding bond holdings conditional on risk of the plan.
