Pension Funds' Performance in Strongly Regulated Industries in Central Europe: Evidence from Poland and Hungary

Following the proposal of the World Bank in the end of the 1990s, a number of Central European countries have extended their pay-as-you-go pension systems by a capital-market-based element in the form of privately managed pension funds. As a result of these reforms, new type of financial institutions - defined contribution pension funds - have been introduced in these countries. To guarantee the security of future pensions, governments imposed regulation on the investment practices and performance of the pension funds. This approach to regulation differs from the traditional "prudent man" rules applied in a number of developed countries. This paper presents an analysis of pension funds' performance in Poland and Hungary, two Central European countries characterized by strong regulation of their private pension fund industries. The paper extends the literature which has so far mostly focused on performance of pension fund industries facing no or only limited regulation. We find that the performance of pension funds in the two studied countries differs. While we do not find convincing evidence of outperformance by Polish pension funds, we find strong evidence of underperformance by Hungarian pension funds. The results are robust to time-variation. The paper considers possible explanations behind these findings. The results of the paper should be of interest for policy-makers seeking to achieve optimal performance of the pension systems and academics in the research area of pension funds.

Bohl, Martin, Judith Lischewski and Svitlana Voronkova (2010), Pension Funds' Performance in Strongly Regulated Industries in Central Europe: Evidence from Poland and Hungary, ZEW Discussion Paper No. 10-076, Mannheim.