Equity performance of segregated pension funds in the UK

We investigate the performance of the UK equity portfolios of 2,175 segregated UK pension funds over the period 1983–97. We find that there is similar pattern in the returns on most of the pension funds and the FT All Share index, leading us to conclude that most funds in the sample are ‘closet trackers’. Any measures of outperformance were therefore bound to be small. Over the whole period and across all funds, average outperformance was insignificantly different from zero. We investigated the sensitivity of the fund returns to the addition of a size premium, which we found to be significant, and important for the smaller funds in our sample. During three sub-periods, we found that there was significant average underperformance during the strong bull market of the mid-1980s, but significant outperformance since 1987. In particular in the period 1987–92, the average outperformance across pension funds was one half of a percentage point per year. Decomposing this abnormal performance, we found that most of it could be explained by the ability of both large and small funds to time the size premium. On the whole, there were negative returns to both selectivity and to market timing. There was little evidence of any differences in the performance between mature and immature funds.