Choice of Pension Management Fees and Effects on Pension Wealth.

Abstract

To shed light on the effects of individual choice on pension wealth, we study a policy change to the management fees of pension funds implemented by Peru's government in 2013. The reform established a new balance fee as a default option; this fee is calculated as a percentage of the pension balance. Each individual had the initial option of keeping the previous management fee, a load factor fee calculated as a percentage of the individual's salary. We use administrative data to simulate pension balances based on the individual's choice of fee and the corresponding counterfactual. Our results indicate that the reform has been potentially adverse to 63.1 percent of individuals, of whom 41.4 percent were assigned to the default option and 21.7 percent voluntarily chose the load fee. These results reflect both the potentially negative unintended effects of the policy and an alarming lack of financial literacy among citizens. We also detect heterogeneity in the intensity of the losses and gains due to the reform, which caused greater losses than gains. In particular, younger and poorer individuals, as well as those automatically assigned to the balance fee, experienced higher losses. Moreover, the new fee scheme is also associated with increasing inequality between individuals' pension wealth.

The Impact of the COVID-19 Pandemic on the Future Pensions of the Peruvian Pension System

“…an amount of money, based on past contributions, guaranteed by the government to those who were previously affiliated with the SNP. Olivera (2020) has used these micro-data to study the ex ante effects of the proposed multi-pillar pension reform, while Bernal and Olivera (2020) have used a similar sample (as of December 2016) to study the effects of the 2013 management pension fees reform.…”

“…Moreover, the densities are also adjusted to take into account the lack of contributions between the last date of the contribution and December 2019. 16 According to this reform, the load factor fee component of the mixed fee regime will gradually reduce down to zero by January 2023, leaving the balance fee as the only fee for people under the mixed fee regime (see more details of this reform in Bernal and Olivera (2020).…”

Gender gap in pension savings: Evidence from Peru’s individual capitalization system

“…Choosing another type of pension fund requires a special administrative procedure. Following Bernal and Olivera (2020) we use these pension fund risk defaults to compute a measure about how active individuals are regarding their portfolio management. The variable Active portfolio management takes the value of one if an individual under 60 has a pension fund type 1 or 3 or whether an individual older than 60 has a pension fund other than type 1; and takes value zero otherwise.…”

“…As the individual has always the option of opting out of the default pension fund risk allocation, we consider that this action implies awareness with portfolio management and therefore may involve better levels of financial literacy. This strategy has also been employed by Bernal and Olivera (2020) when they analyse a reform of pension fund management fees in Peru in which the affiliates could opted out of the default set by the pension policy. It has been noted that knowledge or awareness of risk diversification enable individuals to make better choices of annuities (Lusardi and Mitchell, 2010;Hastings et al, 2010;Banks et al, 2015) and correct decisions in retirement (Clark et al, 2011;Agnew and Szykman, 2011).…”