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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.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 4 (2005)
Issue (Month): 01 (March)
Pages: 31-55

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Handle: RePEc:cup:jpenef:v:4:y:2005:i:01:p:31-55_00

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Cited by:
  1. 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.
  2. 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.
  3. Impavido, Gregorio & Rocha, Roberto, 2006. "Competition and performance in the Hungarian second pillar," Policy Research Working Paper Series 3876, The World Bank.
  4. 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.

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