Choice of pension management fees and effects on pension wealth

We study a policy change to the management fees of pension funds that the Government of Peru implemented in 2013 to shed light on the effects of individual choices on pension wealth. The reform established a new balance fee (default option) that is a percentage of the pension balance unless the individual opts to remain with the current load factor fee that is a percentage of salary. We use administrative data to simulate pension balances that account for the individual’s choice of fee and the corresponding counterfactual. Our results indicate that the reform has been potentially adverse to 63.8 percent of individuals. This figure is composed of 40.4 percent of individuals that were assigned to the default option and 23.4 percent who voluntary chose the load fee. These results reflect that the policy is badly designed and that individuals have an alarming lack of soundness in their financial decisions. We also detect heterogeneity in the intensity of the losses and gains due to the reform, where the losses are larger than the gains. In particular, younger and poorer individuals and those who were assigned to the balance fee show higher losses. Moreover, the change in the fee is also associated with increasing inequality in pension wealth and a reduction in the people’s well-being.