Fee Structure Evolution in the Mexican Pension System

Transcription

1 Fee Structure Evolution in the Mexican Pension System October 2012 Comisión Nacional del Sistema de Ahorro para el Retiro Camino a Santa Teresa # o. piso, Col. Jardines en la Montaña Delegación Tlalpan, C.P , México D.F. Tel. +52 (55) y www. consar.gob.mx

2 Contents I. CONSAR s fee policy: Evolution over time II. Fee Comparison with 401(k) in the US III. Thoughts on alternative policies IV. Final Remarks 2

3 CONSAR s fee Policy: Evolution over time Three regulation stages can be identified in relation to fees charged by Pension Funds (AFOREs) for the management of individual accounts: I. From the beginning of the system in 1997 until 2003: o Where AFOREs could charge two types of fees or a combination of both. o This was the most liberal period where there was no regulatory bias toward fees or returns. II. From 2004 to 2008: o The Law was amended to favor AFOREs that charged the lowest fees (returns were not considered). III. From 2008 until today: o Only one type of fee may be charged by AFOREs. o The main competition driver is the Net Return Indicator. 3

4 Contents I. CONSAR s fee policy: Evolution over time a) Fee Policy before 2008 b) Transition to one type of fee II. Fee Comparison with 401(k) in the US III. Thoughts on alternative policies IV. Final Remarks 4

5 CONSAR s fee policy before 2008 First Stage from 1997 to 2003: The system started with a liberal approach regarding management fees charged by AFOREs AFOREs could charge two types of fees (or a combination of both) to individual account holders: 1. Flow fee: charged to every contribution flow to the individual account. The charge was expressed as a percentage of the wage. 2. Stock Fee: Annual percentage of the assets under management (AUM) by AFOREs. Performance fee, as a percentage of real returns of the fund* Most of the AFOREs charged a combination of flow and stock fees, and also applied discounts for seniority. * Only two AFOREs opted to charge a fee to real returns in

6 CONSAR s fee policy before 2008 Between 1997 and 2003, account holders were insensitive to the fees AFOREs charged. During this period: Account holders had very limited understanding of the total fees they effectively were being charged Difficulty in comparing fees among AFOREs Account holders switched AFOREs without any rational behavior An assessment of the regulator considered a weak market discipline. 6

7 CONSAR s fee policy before 2008 In 2004, in order to promote market discipline, the Law was amended to favor AFOREs that charged the lowest fees. Account holders were allowed to switch before 1 year of permanence as long as they chose an AFORE that charged a lower fee. For purposes of switches, the equivalent fee indicator was the regulatory tool to rank AFOREs. During this period, some reductions in the level of fees were observed, but due to a sizable volume of switches, the commercial costs of the system increased significantly. 7

8 8 CONSAR s fee policy before 2008 By 2007, the fee system faced serious drawbacks that required immediate attention Caveats Implications Equivalent fee: a. Inaccurate It required several assumptions for its calculation b. Complex c. Regulatory arbitrage d. High fees Switch / Transfer Practice: Fees were the main driver of competition among AFOREs. Returns were not considered. Complexity of fee structures (combination of fee and stock fees). Tricky fee reductions Some AFOREs charged up to 25% of the contributions through flow fees Switching in irrational directions. Switching war and bad commercial practices Afores 25% of active accounts switched AFOREs just in 2006 AFOREs with higher net returns were loosing accounts

9 CONSAR s fee policy before 2008 As a consequence, switches did not follow a rational behavior In 2006, the number of fund managers and switches reached its peak, but efficiency and competition was lacking. 9

10 Contents I. CONSAR s fee policy: Evolution over time a) Fee Policy before 2008 b) Transition to one type of fee II. Fee Comparison with 401(k) in the US III. Thoughts on alternative policies IV. Final Remarks 10

11 Third Stage 2008 to date: Transition to one type of fee As of March 2008, the flow fee was eliminated and CONSAR only allowed charging a stock fee. This allowed individual account holders to face more: simplicity transparency comparability This eliminated the consumer s confusion for switching to another AFORE. An indicator on net return was introduced as a parameter for workers to choose the AFORE that yields the greatest net return. NET RETURN INDICATOR RETURN OF = - THE FUND STOCK FEE (% of Assets) 11

12 Transition to one type of fee Since 2010, AFOREs are now required to submit annually their fee structure for the following year CONSAR s Governing Board authorizes the fees AFOREs intend to charge for the following year. An incentive scheme was introduced to foster fee reduction: If a pension fund does not submit their fees on time, it will have to charge a fee equal to the minimum of the authorized fees. If a fee proposal is rejected by the Governing Board, the AFORE will have to charge the average of the authorized fees. In 2010, CONSAR s Governing Board set a path for the fees AFOREs may charge for the period , establishing a cap of 1% for The fee path was set considering improvements in the replacement rate and operating efficiency, as well as to provide legal security to AFOREs. 12

13 Evolution of AFOREs Fees ( ) Average, Maximum and Minimum fees charged by AFOREs Percentage of Assets Maximum Average Minimum Mar Feb Between 2008 and 2012, the average fee has declined by 29.5% 13

14 The dispersion of fees among AFOREs has diminished significantly since 2008 March 2008 Mean 1.96% Dispersion 212 bp Argos, 1.18 Inbursa, 1.18 Bancomer, 1. XXI, 1.45 Afirme Bajío, 1,70 Banorte Generali, 1.71 Banorte Generali, 1 Afirme Bajío, 1.7 HSBC, 1.77 SURA, Banamex, 1.8 Ixe, 1.83 Profuturo GNP, 1.96 Azteca, 1.96 Profuturo GNP, 1.9 Principal, 2.1 Metlife, 2.26 Scotia, 2.33 Invercap, 2.48 Ahorra Ahora, 3.00 Coppel, 3.30 August 2012 PensionISSSTE, 0.99 PensionISSSTE, 0 Inbursa, 1.17 XXI, 1.33 SURA, 1.31 Bancomer, 1 Banamex, 1.2 Profuturo GNP, 1.39 Principal, 1.4 Metlife, 1.54 Azteca, 1.52 Afirme Bajío, 1.5 Coppel, 1.59 Invercap, Profuturo GNP, 1.39 Afirme Bajío, 1.50 Mean 1.38% Dispersion 60 bp 14

15 Since the beginning of the system in 1997, AFORE s fees show a clear downward trend. The implicit fee has decreased from 14.95% in 1997 to 1.33% in Implicit Fee 1 charged by AFOREs (Income from fees / Average Assets under Management) 14 (Percentage of assets) The implicit fee has declined by 91% since Aug Annual Change of the Implicit Fee % -26.1% -23.8% -22.3% -24.0% -13.2% -10.1% -13.5% -18.8% -12.1% -7.2% -5.1% -7.6% -7.6% -5.3% 1/ AFOREs Fee Income / Average assets of workers. Fee income exclude fees regarding services por the management of accounts with assets not invested in SIEFOREs 15

16 Contents I. CONSAR s fee policy: Evolution over time II. Fee Comparison with 401(k) in the US III. Thoughts on alternative policies IV. Final Remarks 16

17 In order to have a reference of the level of fees charged by AFOREs, it can be useful to take into account the 401(k) market. The 401 (k) pension plans market, with more than 511 thousand plans and more than 2.2 trillion USD in AUM 1, exhibit high heterogeneity in their allin fees. 1.60% All-In Fee: % of Assets 2 (Weighted by participant) 1.38% 1.20% 0.80% 0.83% 0.40% 0.28% 0.00% 10th percentile 90th percentile Mean 1 Source: United States Department of Labor (2008). 1 Graph Source: Inside the Structure of Defined Contribution/401(k) Plan Fees: A Study Assessing the Mechanics of the All-In Fee, November 2011, Deloitte Consulting LLP for the Investment Company Institute (ICI). The size sample is 525 pension plans. 17

18 Considering the fees charged by 401(k) plans by average account balances, Mexico s fee structure in 2012 looks aligned. 401(k) plans Median All-in Fee by Average Account Balance (All-in fee expressed as a % of Assets) 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 1.44% 1.17% 0.78% 0.77% Max Min 0.31% < $25,000 $25,000 - $100,000 >$100,000 The median fee in the Mexican system is 1.39%. In the Mexican system, the average account balance is USD 3,034 as of August 31,

19 Contents I. CONSAR s fee policy: Evolution over II. Fee Comparison with 401(k) in the US III. Thoughts on alternative policies IV. Final Remarks 19

20 Thoughts on alternative policies 1. Price Caps o Ensure that the pension industry does not artificially set out of market fees o Promote the alignment of competitive prices. Challenges for Establishing Price Caps Imposing fee caps could result in: A discretional fee May force the exit of AFOREs that have not yet reached economies of scale. Limits on investment strategies and services among AFOREs. differentiation Hinders incentives for financial innovation and risk management policies. The beneficial effects of price caps can only be achieved if there is a separation of investment activities and managing accounts. 20

21 Thoughts on alternative policies 2. Centralize the determination of the investment benchmark o Promotes market discipline to invest in efficient asset allocation Caveats: o Generates the risks of herd behavior and redundancy of fund managers. o Can distort efficient pricing of financial assets. o Federal Government has incentives to intervene in its own benefit as opposed to worker s interest. o Can mix development, stability and political objectives with pensionary goals. o May be difficult to conform a suitable technical committee to determine the benchmark (lack of strong institutions to run the policy). o Transaction costs can be exacerbated due to strategic behavior of market counterparties. 21

22 Contents I. CONSAR s fee policy: Evolution over II. Fee Comparison with 401(k) in the US III. Thoughts on alternative policies IV. Final Remarks 22

23 Final Remarks In managing the fee setting policy, CONSAR faces some challenges on several fronts: Provide legal certainty to allow long term business planning. Avoid the exit from the system of competitive participants. Quantify the effects on costs of regulation/deregulation applicable to fund managers, as well as variety and quality of services Avoid incentive distortion to fund managers. In order for them to be competitive, transparent and accountable; eg. to properly report expenditures, to provide value-added services, become a cost efficient provider, adopt new technologies and innovations, etc.

24 Final Remarks Mexico s transition to one type of fee (as a % of AUM) has resulted in more simplicity, clarity, transparency and comparability among AFOREs. The focus of the policy towards increasing pensionary balances is based not only on fees but on long term net returns, which is the variable that effectively determines final account balances. Even if the short term impact of financial education of account holders is limited, its implementation has to continue in order to strengthen the market discipline pillar through a more active and rational involvement of account holders. 24

25 Evolution of Fee Structures in the Mexican Pension System October 2012 Comisión Nacional del Sistema de Ahorro para el Retiro Camino a Santa Teresa # o. piso, Col. Jardines en la Montaña Delegación Tlalpan, C.P , México D.F. Tel. +52 (55) y www. consar.gob.mx