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Administrative fees and costs of mandatory private pensions in transition economies

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  • DOBRONOGOV, ANTON
  • MURTHI, MAMTA

Abstract

This paper discusses fees and costs of pension companies in transition economies drawing on examples from four countries – Croatia, Hungary, Kazakhstan and Poland – where second pillar pensions have the longest history of implementation. It finds that at current levels, charges are likely to reduce returns on individual account balances by around 1% per annum on average. Exact rates vary by country and company. Fee structures are complex and, generally speaking, poorly understood by consumers. The limited information on costs that is available suggests that, by and large, companies are able to meet their operating costs within a few years after starting operations. There are large sunk costs in setting up business. As a result the industry displays strong economies of scale. Based on the available evidence, the paper estimates fixed costs to be of the order of $35 per account per year (the 95% confidence interval is $21–$49 per account per year). Given costs of this order of magnitude, individual accounts need to be of the order of 4–6% of average wages for the second pillar to be viable i.e. to deliver a return greater than what can be expected from an unchanged first pillar.

Suggested Citation

  • Dobronogov, Anton & Murthi, Mamta, 2005. "Administrative fees and costs of mandatory private pensions in transition economies," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(1), pages 31-55, March.
  • Handle: RePEc:cup:jpenef:v:4:y:2005:i:01:p:31-55_00
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    Citations

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    Cited by:

    1. Jacob Bikker & Jan de Dreu, 2006. "Pension fund efficiency: the impact of scale, governance and plan design," DNB Working Papers 109, Netherlands Central Bank, Research Department.
    2. Werding, Martin & Primorac, Marko, 2018. "Old-age provision in transition: the case of Croatia," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(4), pages 576-593, October.
    3. Oliver Falck & Siegfried Schönherr, 2016. "An Economic Reform Agenda for Croatia: a comprehensive economic reform package prepared for the Croatian Statehood Foundation," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 70.
    4. Bernal, Noelia & Olivera, Javier, 2020. "Choice of pension management fees and effects on pension wealth," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 539-568.
    5. Luca Di Gialleonardo & Mauro Marè, 2015. "The efficiency of Italian pension funds: costs, membership, assets," Working papers 21, Società Italiana di Economia Pubblica.
    6. Sam Flanders & Melati Nungsari & Marcela Parada‐Contzen, 2020. "Pricing schemes and market efficiency in private retirement systems," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 1041-1068, August.
    7. Igor Guardiancich, 2007. "The Political Economy of Pension Reforms in Croatia 1991-2006," Financial Theory and Practice, Institute of Public Finance, vol. 31(2), pages 95-151.
    8. Helen Higgs & Andrew C. Worthington, 2010. "Economies of Scale and Scope in Australian Superannuation Funds," Discussion Papers in Finance finance:201015, Griffith University, Department of Accounting, Finance and Economics.
    9. Di Gialleonardo, Luca & Mare, Mauro, 2016. "The efficiency of Italian pension funds: costs, membership, assets," MPRA Paper 76064, University Library of Munich, Germany, revised Aug 2016.
    10. J.A. Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," Working Papers 13-06, Utrecht School of Economics.
    11. Sluchynsky, Oleksiy, 2015. "Defining, measuring, and benchmarking administrative expenditures of mandatory social security programs," Social Protection Discussion Papers and Notes 95198, The World Bank.
    12. Jacob A. Bikker, 2017. "Is THERE AN OPTIMAL PENSION FUND SIZE? A SCALE-ECONOMY ANALYSIS OF ADMINISTRATIVE COSTS," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(2), pages 739-769, June.
    13. Impavido, Gregorio & Rocha, Roberto, 2006. "Competition and performance in the Hungarian second pillar," Policy Research Working Paper Series 3876, The World Bank.
    14. Emma Aguila & Michael D. Hurd & Susann Rohwedder, 2014. "How Do Management Fees Affect Retirement Wealth Under Mexico’s Personal Retirement Accounts System?," Working Papers WR-1023, RAND Corporation.
    15. Blerina Mucaj, 2006. "Efficiency of Pension Funds Management in OECD Countries: Registered Retirement Savings Plan in Canada," Development Discussion Papers 2006-05, JDI Executive Programs.
    16. Mercedes Alda & Luis Ferruz, 2012. "The Role of Fees in Pension Fund Performance. Evidence from Spain," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(6), pages 518-535, December.
    17. Jackowicz, Krzysztof & Kowalewski, Oskar, 2012. "Crisis, internal governance mechanisms and pension fund performance: Evidence from Poland," Emerging Markets Review, Elsevier, vol. 13(4), pages 493-515.
    18. J.A. Bikker, 2013. "Is there an optimal pension fund size? A scale-economy analysis of administrative and investment costs," Working Papers 13-06, Utrecht School of Economics.
    19. Greco, Luciano G., 2006. "The optimal design of funded pensions," LSE Research Online Documents on Economics 24519, London School of Economics and Political Science, LSE Library.

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