Department of Finance
Date of this Version
2001
Document Type
Article
Citation
Journal of Actuarial Practice 9 (2001), pp. 5-44
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.
Included in
Accounting Commons, Business Administration, Management, and Operations Commons, Corporate Finance Commons, Finance and Financial Management Commons, Insurance Commons, Management Sciences and Quantitative Methods Commons
Comments
Copyright 2001 Absalom Press