This post is related to the » Return on investment funds | monkey and expert» where Pablo Fernandez shows the inability of most fund managers to perform better than the index.

This time, Pablo Fernandez has demonstrated the poor performance in management of pension funds. This below par performance is mostly explained by high annual fees (exceeding 2% in most cases) and high transaction activity, leading to additional brokerage fees. Even though these funds have tax benefits, they continue performing worse than the IBEX 35 in the period 2002-2012.

The role of pension funds is very simple. Invest some money now and by the time you reach retirement, you will enjoy the returns generated by your investments. Since the current public Spanish pension system is far from sustainable, private pension funds will be generating attention in the coming years

Currently active workers contributing to social security are maintaining the costs of pensioners. But what happens in a scenario with an inverted population pyramid, with a large segment of elderly population ? or a scenario with a very high unemployment rate ?

It is very difficult to maintain this structure, since it leads to more deficit from the state and the government has to take unpopular measures, like raising the retirement age or freezing pension for longer periods, … but how far can this go? It is clear that in the foreseeable future, pension plans will need an increased mix of public-private plans in order to receive a decent pension in the future.

The following graphic tells us that private funds may not be the best option. Only 0.35% of funds studied (out of 573 ) outperformed the IBEX 35, and the vast majority of funds, 69 % passed with more pain than glory with results between 0 and 3 % in the period 2002-2012.

source : » Return on pension funds in Spain . 2002-2012 » Pablo Fernandez , Javier Aguirreamalloa , Pablo Linares.

And now . What you do with your savings ?