Performance of Personal Pension Funds in Portugal
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Performance of Personal Pension Funds in Portugal Maria Teresa Medeiros Garcia 1
& Beatriz
Costa 2
Published online: 6 August 2020 # International Atlantic Economic Society 2020
Abstract This paper analyses the performance of personal pension funds in Portugal, during the period from 1999 to 2016, providing the first detailed analysis of this matter. Three performance measures are used: the Sharpe ratio, the difference between the returns of the fund and its benchmark, and the M2 measure. The findings show that the performance of these funds is very low and that their returns are not significantly different from zero, which might be the result of government-imposed limits concerning asset allocation. Additionally, evidence was found confirming that these funds, on average, underperform their benchmarks. Tax gains seem to be the main reason why people decide to invest a portion of their wealth in these funds, rather than in other investment forms where there are no penalties in the case of early withdrawals. Keywords Personal pension funds . Performance JEL G11 . G23
Introduction Enrolment in personal pension plans has been encouraged by governments to stimulate saving for retirement in the context of the alleged financial crisis of the public pension pay-as-you-go systems. Indeed, the increase in average life expectancy, from 67 years in 1960 to 80 years in 2015 in Organisation for Economic Co-operation and Development (OECD) countries, combined with the decrease in the fertility rate from 3.2
* Maria Teresa Medeiros Garcia [email protected]
1
UECE/REM - ISEG, Lisbon School of Economics and Management, Universidade de Lisboa, Rua Miguel Lupi, 20, 1249-078 Lisbon, Portugal
2
ISEG, Lisbon School of Economics and Management, Universidade de Lisboa, Lisbon, Portugal
260
Garcia M.T.M., Costa B.
children to 1.7 children, has led to an ageing population, which presents challenges to public pension pay-as-you-go systems (World Bank 2017). To mitigate the impact of public pension parametric reforms on replacement rates,1 a multi-pillar system has been defended by specialists (World Bank 1994). This system would be flexible, aiming to address the needs of the population and provide more security against the economic, demographic, and political risks faced by public pension systems. The first pillar should be mandatory and publicly-managed, as part of a country’s social security system, together with a defined benefit and pay-as-you-go scheme. The second pillar should be voluntary, provided by companies in the form of occupational pension plans (defined benefit or defined contribution schemes), and privately managed through funded pension funds. The third pillar would consist of a voluntary defined contribution scheme, where an individual can opt to make contributions to a personal pension scheme or individual retirement account. A personal pension plan (PPP) is an individual retirement account whose purpose is to provide lifetime income security during retirement. Contributions are made during an employee’
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