Spanish pension funds with strong governance structures have enjoyed better investment performance than those without, a study by Towers Watson has revealed.

The study – the first of its kind to be carried out in Spain, according to the pension consultants – attracted responses from 27 funds, worth an estimated €16bn in total. The responses account for around half the €31bn in assets held by the country’s private pensions industry and the majority of the €24bn held by the country’s 40 largest.

Towers Watson asked the funds whether they have a dedicated structure for analysing investments, whether and how often they review their investment policy, and if they have a risk budget, among other questions.

Average performance figures for the 12 months to 30 June 2013 were then compared with those for the Spanish occupational pensions industry as a whole, using data from INVERCO, Spain’s investment and pension association.

According to Towers Watson, the average asset allocation of Spanish corporate  pension funds was roughly split between 75% in fixed income and 25% in equities.

Of the 40 largest funds responding to the survey, the vast majority – 82% – engaged expert advice or had in place formalised structures to manage investments, while within this group, 39% of respondents had a dedicated body, such as an investment committee.

Within a drafted investment policy, deciding a target income which the pension fund was expected to beat also improved performance, not only compared with the pensions industry as a whole, but also compared with the forty largest funds lacking a target. Of the funds responding to the survey, 57% used matching or beating of inflation as a goal.

Furthermore, 79% put in place a risk budget in order to achieve their agreed investment target and 75% conducted monitoring exercises on their fund’s investments, either monthly or quarterly.

David Cienfuegos, head of investment, Towers Watson Spain, said: “The empirical results of the survey show that the more dedicated the control commissions relating to investments, and the more developed the governance structures for investing, the better the results.

“The Top 40 have a governance structure that manages risk better than the market as a whole,” he added.

The median return over five years for the top 40 respondents was 3.75% per year, compared with 2.86% per year for Spanish occupational pension funds as a whole.

Their emphasis on strong governance also resulted in better risk management, as shown by better worst-case results.

The 95th percentile in the top 40 respondents returned 1.21% per year over five years, compared with -1.24% per year for the worst performers across the industry.

“But even without these outliers, the difference in performance over five years is 2.45% per annum, which is a very big margin,” said Cienfuegos.

Engaging expert advice also appeared to produce a superior performance.

For those top 40 funds using expert advice, the median result over five years was 4.10% per year, compared with 2.86% per year for the pensions industry as a whole, though over one year this was 7.96% compared with 8.13%, a slight underperformance.

The performance of the top 40 funds with a clearly defined investment objective was then compared with the performance of those in the top 40 without such an objective: their performance was superior over all time periods.

Over one year, the median return for those pension funds with a defined investment objective was 8.16% compared with 6.70% for those without. Over three years, the annualised respective returns were 4.77% and 2.91% and over five years, 4.16% and 2.43%.

The frequency with which pension funds review their investment policy was also investigated, as was its impact on results: over two-thirds (68%) review the policy at least once a year.

The results over one, three and five years for those top 40 funds reviewing their investment policy at least annually were then compared with the average performance for Spanish occupational funds as a whole.

Cienfuegos said: “Those pension funds which carry out a revision of the investment policy at least annually, achieve not only better returns than the sector in the short, medium and long term, but also get a better return in the worst-case scenarios – that is, they get better risk management.”