Do pension funds beat inflation? Assessing trend-dependent risk and dominance techniques

Abstract In this paper, we address whether pension fund investments are losing value over time. We propose a new methodology for pension fund risk and performance evaluation based on the trend-risk measurement concept. We analyze the two-sided and downside deviations from a given trend. In the long term, inflation and consumer price changes significantly affect an investor’s wealth. For this reason, we consider these macroeconomic indicators to represent a time-dependent trend, which pension funds should outperform. Furthermore, we propose the concept of Time-Cumulative Dominance. This methodology serves as a valuable tool for both portfolio managers and regulators. In the empirical part, we study this new methodology across various pension funds in Lithuania while reflecting on various market conditions and regimes detected by Hidden Markov Models. The results highlight the impact of portfolio composition on the ability to outperform inflation and consumer price changes in the long-term period. We also observe a negative effect during market anomalies.