A comparison of fees of 21 countries with private defined contribution pension systems shows pension funds in Latin American countries are among those with the lowest cost structure. Other key findings of the study undertaken by the International Organisation of Pension Supervisors (IOPS) show voluntary systems having higher charge ratios and that high contribution and wage rates deliver higher balances and therefore lower charge ratios.

A charge ratio measures the impact that any type of administrative charge can have on the final balance of an individual retirement account compared to the hypothetical balance that could be obtained if no administrative fees were charged.  The report measures the different fees charged by pension fund managers to member accounts in three different groups of countries: Latin America, Central and Eastern Europe and other countries or jurisdictions (among them Hong Kong and Turkey) with defined contribution-based systems.

IOPS does not break down the data into administrative or asset management fees: all charges are bundled together. IOPS used a number of sources, among them the World Bank, the Comision Nacional del Sistema de Ahorro para el Retiro in Mexico and the Organisation for Economic Cooperation and Development (OECD). The report cautions that the underlying data for some of the countries may not be directly comparable due to differences in calculating fees from one country to another.

Charge ratio

In order to compare administrative fees, a number of unifying assumptions were made in all of the analysed countries: comparisons were made by projecting a value for a defined contribution pension fund accumulated over the working life of the average worker in each country, using a fixed assumption for return on assets. The accumulated balance was then reduced by the charges and fees that each country’s pension regulation imposes. The amount by which the accumulated balance is reduced was over 40 years.

The charge ratio was the lowest for Bolivia (.39%), followed by El Salvador (.49%), Uruguay (.51%), Colombia (.53%), Israel (.57%), Chile (.61%), Mexico (.62%), Peru (.63%), Argentina (.77%), Poland (.78%),  Slovak Republic (.82%), Dominican Republic (.84%), Macedonia (.88%), Costa Rica (.92%), Croatia (.98%), Hungary (1%), Hong Kong (1.79), Serbia (1.86%), Czech Republic (1.92%), Turkey (2.48%).

“Another conclusion which can be drawn is that some systems with more providers tend to be more expensive,” notes IOPS’ working paper. “For the majority of the countries, economies of scale may be found where limited providers operate in a market, whilst where there are multiple providers they will have to compete for business, which will involve marketing and sales costs.” One exception is Mexico which has the highest number of providers (21), yet is relatively less expensive than Hong Kong and Turkey.

Turkey, which has the highest charge ratio, is a relatively new system having been introduced in 2003. Charges have declined since the launch of the system and may continue to do so over time. Costs in Bolivia are low “due to limited investment options with 90% of pension assets invested in domestic treasury bonds. In Serbia, ranked the second most expensive, asset managers charge high fees on flows (2.13%) and the charge on assets is 2%, the maximum limit imposed.

“The highest charge ratios belong to countries and jurisdictions where either there are no restrictions, as in Czech Republic and Hong Kong, or the limits are high, as in Serbia and Turkey. The lowest belong to restrictive countries such as Bolivia, Israel, Poland and Macedonia.”

VB