1 / 18

Paying for pensions

Paying for pensions. Administrative charges, individual choices and institutional structures Edward Whitehouse Oaxaca, Mexico, May 2006. Agenda. Measuring charges for private pensions: what have trends in charges been? Policies on charges: how to keep them low

ciaran-caldwell
Download Presentation

Paying for pensions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Paying for pensions Administrative charges, individual choices and institutional structures Edward Whitehouse Oaxaca, Mexico, May 2006

  2. Agenda • Measuring charges for private pensions: what have trends in charges been? • Policies on charges: how to keep them low • How institutional structures and the degree of individual choice affect charges • Evidence from OECD countries, Latin America and Eastern Europe

  3. Measuring charges • Complex charge structures • comparisons are difficult both between countries and between providers • A single measure of charges: • charge ratio: proportion of accumulated balance • reduction in yield: proportion of assets in fund at any one time • Illustration: assume 3.5% real return, 2% wage growth and 40 year term 50 Charge, % of accumulation 45 40 35 30 25 20 15 10 5 0 0 0.5 1 1.5 2 2.5 3 Charge, % of assets

  4. Charge ratios Australia (retail) Mexico UK (personal) Bulgaria Peru Argentina UK (stakeholder) Poland Uruguay El Salvador Sweden Colombia Chile Australia (industry) Bolivia 0 5 10 15 20 25 30 35 40

  5. Trends in charges: Chile 30 Charge ratio, % 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005

  6. Trends in charges 45 40 Argentina 35 Mexico 30 Bulgaria Peru 25 20 El Salvador Poland 15 Uruguay Chile, Colombia 10 5 0 1999 2000 2001 2002 2003 2004 Source: FIAP, OECD

  7. Policies on charges: indirect measures • Disclosure: • standard format • league tables • public information • Incentives: • person who bears the charge should choose the provider • levy charges on top of contributions • Transparency: • a single ‘price’ for pensions • Restrict switching providers: • might reduce marketing costs

  8. Policies on charges: direct measures • Ceilings on charges: • El Salvador, Kazakhstan, Poland, Sweden, UK (stakeholder) • Subsidies to low-income workers: • Mexico • Force switchers to choose lower cost funds: • Mexico • Subsidise charges: • New Zealand (KiwiSaver) • Cross-subsidise charges: • Sweden • Different institutional and structural approaches

  9. Individual choices

  10. Investment choice: 401k plans Source: Schieber, Dunn and Wray (1998)

  11. Investment choice: Australia % of assets average with choice choices • Corporate 73.9 4 • Industry 98.0 7 • Public sector 56.5 6 • Retail 88.1 59 • Total 85.3 23 Source: Australian Prudential Regulatory Authority

  12. Consolidation 30 Number of providers Bulgaria 8 Estonia 6 Hungary 6 Kazakhstan 14 Slovak Republic 8 25 Argentina Poland 20 Chile Mexico 15 Dominican R Colombia 10 Costa Rica Uruguay Peru 5 El Salvador Bolivia 0 1995 2000 2005

  13. Portfolio choices • Mexico 2 • Slovak Republic 2-3 • Estonia 3 • Peru 3 • Chile 5

  14. How many investment choices? • Choice increases welfare • Choice increases participation • 50% of people eligible participate in 401ks without choice, 87% with choice • controlling for individual and employer characteristics, introduction of choice increases average contribution by 43%, from 5.1% to 7% Source: Papke (2004) 1 870 individuals HRS data

  15. How many investment choices? • Demotivation and choice overload: consumer studies show more choice = • more interest • fewer purchases • more uncertainty over choices • Distribution of choice in 401ks: 2-59 funds, median 13, 90% between 6 and 22. Effect of adding 10 funds to the menu • participation -2% • portfolio share of ‘safe’ investments: +5.4%ge pts • portfolio share of equities: -8%ge pts Source: Iyengar and Jiang (2003) 800 000 individuals in 650 401k plans managed by Vanguard

  16. Conclusions • Emphasis in Latin America and Eastern Europe was on choice of provider • Only recently has there been a move towards choice of investment portfolio • Consolidation has reduced range of provider choice • OECD countries are actively considering different structural solutions to reduce costs • centralised collection of contributions • centralised recordkeeping • outsourced fund management • limited choice of investments

  17. Contact details • Edward Whitehouse • ELS/SPDOECD2 rue Andre Pascal75775 Paris Cedex 16France • +33 (1) 45 24 80 79 • edward.whitehouse@oecd.org • www.oecd.org/els/social

  18. Further reading • Administrative charges for funded pensions: measurement concepts, international comparison and assessmentJournal of Applied Social Science Studies, 2000 • Paying for pensionsOccasional Paper no. 13, Financial Services Authority, 2000 (free download: www.fsa.gov.uk) • Administrative charges for funded pensions: comparison and assessment of 13 countriesin Private Pension Systems: Administrative Costs and Reforms, OECD, 2001 • Costs and charges for administering individual pension accounts in India: national and international evidencein Rethinking Pension Provision for India, Tata McGraw-Hill, New Delhi, 2003 • Administrative charges for funded pensions: an international comparison and assessmentSocial Protection Discussion Paper no. 0016, World Bank, 2000 (free download: www.worldbank.org/pensions)

More Related