Liquidity Shocks and Pension Fund Performance: Evidence From the Early Release Scheme

We study how expectations of fund flows causally affect fund performance by exploiting a quasi-natural experiment in the Australian pension system where an unexpected policy change temporarily allowed fund withdrawals from a pre-specified date in the future. Using fractions of young members, middle-aged members, and government co-contributions for low income earners as instrumental variables, we find an insignificant effect of expected fund outflows on fund performance. A potential explanation is that Australian superannuation funds preemptively engage in liquidity management in response to changes in expectations of future fund flows and that this helps to limit direct and indirect costs in the rebalancing process.