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Administrative Fees and Costs of Mandatory Private Pensions in Transition Economies

Journal of Pension Economics and Finance, Vol. 4, No. 1, pp. 31-55, March 2005

Posted: 16 Aug 2005  

Anton Dobronogov

World Bank

Mamta Murthi

World Bank

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.

Keywords: {ensions, private pension funds, administrative fees, transition economy

JEL Classification: G23, J14

Suggested Citation

Dobronogov, Anton and Murthi, Mamta, Administrative Fees and Costs of Mandatory Private Pensions in Transition Economies. Journal of Pension Economics and Finance, Vol. 4, No. 1, pp. 31-55, March 2005. Available at SSRN: https://ssrn.com/abstract=775369

Anton Dobronogov (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://www.worldbank.org

Mamta Murthi

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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