THE EFFICIENCY OF PENSION FUND MANAGERS IN LATIN A

CentreonRegulationandCompetitionWORKINGPAPERSERIESPaperNo.11THEEFFICIENCYOFPENSIONFUNDMANAGERSINLATINAMERICAArmandoBarrientosUniversityofManchesterAzisBoussofianeUniversityofHertfordshireBusinessSchoolOctober2001ISBN:1-904056-10-5Furtherdetails:Publishedby:FionaWilson,CentreSecretaryCentreonRegulationandCompetition,InstituteforDevelopmentPolicyandManagement,UniversityofManchester,CrawfordHouse,PrecinctCentre,OxfordRoad,MANCHESTERM139GHTel:[phone]Fax:[phone]Email:[e-mail]:(Barrientos1998;Mesa-LagoandBertranou1998;Queisser1998b)1.Thecreationofapensionfundmanagementmarketisoneofthemostconsequentialeffectsofthereform,withfarreachingimplicationsfortheevolutionofthereform,anditsimpactupontheeconomiesoftheregion(Barrientos1999).Pensionfundmanagershavemanyimportantfunctions.Theycollectworkers'contributionsintoapensionfund,investthisfundinarangeoffinancialassets,arrangedisabilityandsurvivorinsuranceforactivecontributors,pensionbenefitsforthoseretired,andprovidearangeofsupportingservices.Thesuccessorfailureofthepensionreformwillcometodependonwhetherthepensionfundmanagersareeffectiveaspensionproviders.ThedesignersofthenewpensionschemesinLatinAmericaaimedforthepensionfundmanagerstooperateinacompetitiveenvironment,albeitsubjecttodetailedsupervisionandregulation.Competitionextendstocommissionandcharges,ratesofreturn,andthequalityoftheservicesprovided.Contributorsareabletotransfereasilyfromonepensionfundmanagertoanotherinsearchofabetterdeal.Thisismeanttoensurethatcompetitivepressuresspurthepensionfundmanagers.Theregulationoffundmanagersissetbygovernmentauthorities,andimplementedbyanadhocregulator.Regulationisextensive,andcoversproducts,commissionandcharges,investmentportfolios,ratesofreturn,andstandardsofserviceandprobity.Bycomparisonwithissuesofpensionplandesign,theliteratureonpensionfundmanagersinLatinAmericaissmall(Queisser1997,1998a;Sinha,Martinezetal.1998;Barrientos1999).Inpartthisisbecausepensionreformhasbeenestablishedonlyrecentlyintheregion.Giventheperformanceofpensionfundmanagerstodatehasbeenmixed,issuesregardingtheefficiency1PensionreformwasimplementedinChile(1981),Peru(1993),ArgentinaandColombia(1994),Uruguay(1996),BoliviaandMexico(1997),CostaRicaandElSalvador(1998).SimilarreformshavebeenimplementedinPoland,HungaryandKazakhstan.3andregulationofthepensionfundmanagementmarketmustbetackledurgently.Thepaperaimstocontributetothisliteraturebydevelopingmeasuresoftheefficiencyofpensionfundmanagersusingdataenvelopmentanalysis.Itidentifiestrendsintheperformanceandefficiencyofpensionfundmanagers,theimpactoftheregulation,anddiscusseswhethermarketpressuresorregulationexplainthehighcostsofpensionplans.TheempiricalworkfocusesonChilebecauseithasthelongestexperiencewithpensionreform,andbecauseitprovidedamodelofthecompetitiveandregulatorystructureforpensionfundmanagerswhichotherscountrieshavefollowedclosely.Thepaperisorganisedasfollows.SectionOneprovidesanoutlineofthemainfeaturesofthenewpensionfundmanagementmarketestablishedbypensionreform.SectionTwoexplainsthefocusontheefficiencyofthenewpensionfundmanagersandidentifiesthekeyissuesforanalysis.SectionThreeoutlinesdataenvelopmentanalysisanddiscussesitsappropriatenesstothestudyofpensionfundmanagers.SectionFourpresentsestimatedmeasuresofefficiencyofpensionfundmanagersinChileanddiscussestheirimplications.1.PensionReformandtheNewPensionFundManagersThe1981pensionreforminChileanreplacedunfundedpensionschemeswithindividualretirementsavingplans.Inthenewpensionplans,dependentworkersarerequiredtocontributeafractionoftheirearningstoanindividualretirementaccountwithapensionfundmanager.Independentworkerscanmakevoluntarycontributions.Thepensionfundmanagers(AdministradorasdeFondosdePensionesorAFPs)supplytheadministration,investmentandmanagementofindividualretirementaccounts.Thepensionfundmanagersarecorporationssetupwiththeexclusiveobjectiveofmanagingindividualretirementaccounts,andareregulatedbytheSuperintendenciadeAdministradorasdeFondosdePensiones(SAFP).Thepensionfundmanagerscollectworkers'contributionsintoapensionfundandinvestthisfundinarangeofpermittedassets.Untilrecently,thepensionfundmanagerscouldonlyadministerasinglepensionfundforalltheiraffiliates,butregulationsintroducedin1999allowedthemtoofferasecondfundwithafixedinterestportfolioaimedatprotectingworkersclosetoretirementfromthefluctuationsofvariableinterestassets.Boththesefundsareinsulated4fromthepensionfundmanagers'ownassets,whichbelongtotheirshareholderstowhomprofitsaredistributed.Thepensionfunds,ontheotherhand,areownedbytheaffiliates.Theonlyflowsallowedbetweenthepensionfundandthepensionfundmanagers'assetsconsistofpermitteddeductionsforcommission.2.ThePerformanceofPensionFundManagers:EfficiencyandRegulationIssuesThissectionexaminesthebehaviourandperformanceoffundmanag