Abstract

Journal of Actuarial Practice

Volume 9, Numbers 1 and 2, 2001

Analyzing Management Fees of Pension Funds: A Case Study of Mexico

Tapen Sinha

Abstract

Though the rates of return for public pension funds have been high over the past two decades, one critical aspect of the financing of this type of fund is often overlooked: high management fees. As a result, the rates of return for workers who have invested in these funds have not necessarily been high. Management fees charged on pension funds in Mexico result in a leakage of funds in the order of 20–30% of the fund. That is, the amount at retirement would have been 20–30% higher had there been no fees.

A model is developed that includes all the diverse fees and discounts. No other model of the Mexican system contains all of these fees and discounts. Therefore, simulations from other studies do not yield reliable results. Our simulation results show that it is rarely optimal (from the point of view of minimizing lifetime management fees) to stay with one company. Also, no company dominates all others with respect to the minimization of its fees. Unfortunately, because of the complexity of the fee structure, it is difficult to say much beyond this. This research shows that the risks that the privatized system carries may be much higher than what appears at first sight.

Key words and phrases: contributions privatization, defined contribution plan, Chile, retirement fund, pay-as-you-go, AFORE, simulation.

Corresponding Author:

Tapen Sinha

Department of Actuarial Studies,

Instituto Tecnológico Autónomo de Mexico (ITAM)

Rio Hondo No. 1,

Col. Tizapán San Ángel,

C.P. 01000 México, D.F