Paying for pensions

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
Portfolio no Portfolio limited Portfolio yes
Provider no Denmark Hong Kong Ireland (OP) Switzerland Australia (members of corporate, industry, public-sector funds until 2005) United States (TIAA/CREF, TSP) Singapore United States (401k)
Provider limited Hungary Chile Estonia Peru Slovak Republic
Provider yes Argentina Mexico Poland Australia (2005 on until 2005 for retail funds) Sweden United Kingdom (personal, stakeholder) United States (IRA, Keogh)
10
Investment choice 401k plans
of members 1978 1994
Investment choice
Employee contributions 16 94
Employer contributions 10 74
Number of investment choices
1 51 12
2 28 7
3 13 9
4 4 15
5 4 58
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 5.4ge
  pts
• portfolio share of equities -8ge 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_at_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)