Spanish pension funds show manager skill, but negative returns after fees
A Banco de España paper analyzes the financial performance of Spanish individual pension funds. It finds that while fund managers demonstrate skill before fees, investors typically do not achieve positive risk-adjusted returns after fees.
Fees erode investor returns
The Banco de España paper finds that Spanish individual pension funds, on average, do not provide positive risk-adjusted returns after fees.
This aligns with broader investment management literature.
Between 2006 and 2022, average risk-adjusted performance for these funds ranged from -1.37 percent to 0.01 percent annually after fees.
However, the study identifies fund manager skill, with positive risk-adjusted returns before fees and observable performance persistence.
Spanish households also respond to fund performance by reallocating savings to well-managed funds, evident in both inflows and outflows.
Individual pension funds represent nearly 70 percent of the Spanish pension market, holding €84.9 billion in assets at the end of 2023.
Recent regulatory changes reduced the maximum deductible investment amount to €1,500 in 2023, causing inflows to drop from €4.2 billion in 2022 to €1.5 billion in 2023.
Tax incentives and withdrawal rules
Spanish households use defined contribution pension funds for retirement savings, benefiting from tax advantages like deferred income taxes.
The market includes employer-based funds (€36.6 billion by end-2023) and individual pension funds (€84.9 billion by end-2023), the latter being this paper's focus.
Individual funds have distinct tax treatments and withdrawal rules.
Investments are deductible from taxable income, but the maximum amount has sharply declined from €10,000 before 2015 to €1,500 in 2023.
Withdrawals are generally restricted to retirement, long-term unemployment, death, or severe illness.
From January 2025, free redemption will be allowed after a 10-year investment period.
A paradox for Spanish savers
The paper reveals a fundamental disconnect: despite evidence of manager skill, Spanish pension funds consistently fail to deliver positive risk-adjusted returns after fees.
This suggests that the current fee structure, combined with diminishing tax incentives, creates a significant hurdle for effective retirement savings.
While the upcoming 10-year redemption rule offers some flexibility, it is unlikely to fundamentally alter the challenging net return landscape for investors.