Paying for Pensions an International Comparison of Administrative Charges in Funded Retirement-Income Systems

Abstract

High charges for personal pensions were one factor in the personal pensions mis-selling debacle in the United Kingdom. They continued to arouse concern among politicians and commentators. The Labour government, with its new flagship 'stakeholder' pension, chose to regulate both the structure of charges and their level. This paper assesses the international experience of charges in funded retirement-income systems, drawing on evidence from fourteen countries with very diverse policies.

The paper discusses alternative measures of charges. Measuring the price of financial services is more difficult than comparing the cost of other goods or services. Providers can levy many different kinds of charges. These can include one-off and ongoing charges; proportional and fixed-rate fees; some based on contributions, some on the value of assets in the fund and some on investment returns. These different charges accumulate and interact in complicated ways over the membership of a pension plan. The most familiar summary measure of charges is the 'reduction in yield'. This adds together all the charges over the lifetime of an example pension policy and expresses them as a percentage of assets. Measuring charges as a proportion of contributions is the alternative. This turns out to be the same as calculating lifetime charges as a proportion of the balance accumulated at retirement. This second measure is known as the 'reduction in premium' or the charge ratio.

The fourteen countries surveyed adopt very different approaches. At one end of the spectrum, Australia and the United Kingdom (with personal pensions)have completely liberal policies on charge levels and structures, but require providers to set out the effect of charges in a standard format. Most Latin American countries, including Argentina and Chile, restrict the charge structure:in these cases, allowing a fixed fee plus a charge as a proportion of contributions. Poland,too, limits the types of fee that can be levied, but also limits funds to charging 0.6 per cent of assets, while other charges are uncapped. Sweden, Kazakhstan and the United Kingdom (with stakeholder pensions)restrict both the charge structure and the charge level. In the last two, there is a fixed ceiling while Sweden varies the cap using a complex formula based on the amount that providers charge to manage voluntary savings. Finally, Bolivia auctioned the rights to manage its mandatory pension fund assets to international fund managers.

Keywords: Price of financial services, Stakeholder Pensions, Fund Managers, Australia, United Kingdom, International

JEL Classification: L5