Choice of Pension Management Fees and Effects on Pension Wealth

Luxembourg Institute of Socio-Economic Research (LISER) Working Paper Series 2020-02

54 Pages Posted: 18 May 2020

See all articles by Noelia Bernal

Noelia Bernal

CentER, Tilburg University

Javier Olivera

LISER; KU Leuven, Department of Economics

Date Written: March 4, 2020

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.

Keywords: Pension savings, management fees, individual retirement accounts, pension reform, inequality, Peru

JEL Classification: D31, G28, J14, J32

Suggested Citation

Bernal, Noelia and Olivera, Javier, Choice of Pension Management Fees and Effects on Pension Wealth (March 4, 2020). Luxembourg Institute of Socio-Economic Research (LISER) Working Paper Series 2020-02, Available at SSRN: https://ssrn.com/abstract=3578375 or http://dx.doi.org/10.2139/ssrn.3578375

Noelia Bernal (Contact Author)

CentER, Tilburg University ( email )

Javier Olivera

LISER ( email )

11 Porte des Sciences Campus Belval
Maison des Sciences Humaines
Esch-sur-Alzette, L-4366
Luxembourg

HOME PAGE: http://https://sites.google.com/site/javierolive/

KU Leuven, Department of Economics ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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