FEDERAL UNIVERSITY OF RIO DE JANEIRO COPPEAD GRADUATE SCHOOL OF BUSINESS Ian Richard de Ridder Administrative costs of pension funds: the impact of fund characteristics Rio de Janeiro 2017
IAN RICHARD DE RIDDER Administrative costs of pension funds: the impact of fund characteristics Masters Dissertation presented to COPPEAD Graduate School of Business, of the Federal University of Rio de Janeiro, as part of the requirements to obtain the title Master of Business Administration. Supervisor: Prof. Carlos Heitor Campani, Ph.D. Rio de Janeiro 2017
Administrative costs of pension funds: the impact of fund characteristics Ian Richard De Ridder Masters Dissertation presented to COPPEAD Graduate School of Business, of the Federal University of Rio de Janeiro, as part of the requirements to obtain the title Master of Business Administration. Approved by: Carlos Heitor Campani, Ph.D. COPPEAD/UFRJ Margarida Sarmiento Gutierrez, D.Sc. COPPEAD/UFRJ Sérgio Guimarães Ferreira, Ph.D. BNDES Rio de Janeiro 2017
ABSTRACT RIDDER, Ian Richard de. Administrative costs in pension funds: the impact of fund characteristics. 2017. Dissertation (Masters in Business Administration) - COPPEAD Graduate School of Business, Federal University of Rio de Janeiro, Rio de Janeiro, 2017. Administrative costs per participant vary widely across pension funds, even when economies of scale are considered. Defining potential sources of these costs is important because such costs decrease the rate of return pension funds achieve on their participants assets. Consequently, these costs decrease future pensions. This article seeks to gain a better understanding regarding which other factors impact administrative costs incurred by pension funds using data on over 200 Dutch pension funds concerning the year of 2015. The study confirms that scale economies were the most significant indicator of lower administration costs per participant. Furthermore, it is found that the amount of assets per participant held by a fund had a significant positive relation with costs. Comparing the results with prior research from 2004 shows that, although scale increased, administrative costs per participant had risen significantly in the Netherlands, which is counterintuitive. Simultaneously the assets per participant held by funds had risen significantly as well. Therefore, it seems that administrative costs could be more correlated to the value of participants assets than thought before. Comparing the results with Brazilian pension funds, it is found that these were significantly smaller in size, leading to significantly higher administrative costs per participant. Keywords: Pension funds, administrative costs, economies of scale, assets per participant
LIST OF FIGURES Figure 1: Gross pension replacement rates for 2016.... 16 Figure 2: % of gross domestic product spent in 2013 on pensions split by public and private spending.... 17 Figure 3: Pension schemes per country and their perceptual contribution to retirement income.... 18 Figure 4: Three pillar Dutch pension system... 22 Figure 5: Age pyramid of 1990 for the Netherlands. Number of males and females in the population per age group x1000. Source: Figure created by author. Data from the Dutch Central Bureau for Statistics, www.cbs.nl.... 23 Figure 6: Age pyramid of 2017 for the Netherlands. Number of males and females in the population per age group x1000. Source: Figure created by author. Data from the Dutch Central Bureau for Statistics, www.cbs.nl.... 24 Figure 7: Old-Age Dependency percentage for various countries of the years 2000 and 2015. Source: Figure created by author. Data from www.worldbank.org... 25 Figure 8: Old-age dependency ratio and Pensioner per worker ratio in the year 2000.... 26 Figure 9: Pension funds invested assets in the Netherlands from 1997 to 2015 and retirees per contributor ratio in these same funds from 1997 to 2015.... 27 Figure 10: Observed economies of scale in prior research.... 34 Figure 11: Type of pension fund regressions related to administrative costs in the Netherlands.... 36 Figure 12: Number of pension funds, grouped by administrative costs per participant.... 41 Figure 13: Administrative operating costs per participant, per year, in relation to the number of participants in a pension fund.... 42 Figure 14: Number of pension funds, grouped by pensioner per worker ratio.... 44 Figure 15: Number of pension funds, grouped by % premium paid by employer.... 45 Figure 16: Administrative costs per participant, grouped by % premium paid by employer... 46 Figure 17: Type of participants associated with different assets / contributions ratios.... 48 Figure 18: Percentage of pension funds, grouped by real coverage ratio... 49 Figure 19: Number of reported funds grouped per number of participants considering data from 2004 and 2015.... 50 Figure 20: Number of reported funds grouped by total invested assets with regards to data from 2004 and 2015.... 52 Figure 21: Administrative operating costs per participant, per year. Grouped by fund size in terms of number of participants.... 54 Figure 22: Administrative operating costs per participant, per year. Grouped by fund size in terms of invested assets.... 54 Figure 23: Mean Administrative operating costs per participant per year, grouped by number of participants for Brazil 2014 adjusted for inflation and the Netherlands 2015.... 58 Figure 24: Mean Administrative operating costs per participant per year, grouped by invested assets for Brazil 2014, adjusted for inflation and the Netherlands 2015.... 59
LIST OF TABLES Table 1: Administrative operating costs grouped by number of participants.... 43 Table 2: Administrative operating costs grouped by invested assets.... 43 Table 3: Number of participants in pension funds, by type of participation.... 44 Table 4: Premium payments over complete year.... 45 Table 5: Average administrative costs and % of retirees for funds, grouped by assets / contributions ratio.... 47 Table 6: Mean administrative costs for pension funds, grouped by real coverage ratio.... 49 Table 7: Total participants (in thousands) per group based on size for 2004 and 2015.... 51 Table 8: Average administrative costs for pension funds in 2004 and 2015.... 53 Table 9: Complementary pension funds in Brazil and in the Netherlands.... 56 Table 10: Percentage of participants in funds grouped by number of participants.... 56 Table 11: % of participants in funds grouped by invested assets.... 57 Table 12: Mean administrative costs per participant per year in the Netherlands and Brazil.. 57 Table 13: Mean assets per participant, grouped by number of participants in The Netherlands and Brazil.... 59 Table 14: Pearson correlation matrix (sample size = 216) for the variables: administrative operating costs per participant (log), premium % employer, contributors ratio, excontributors ratio, retirees ratio, number of participants (log), real coverage ratio, assets per participant and assets / contributions ratio. The variable premium % employees was omitted since it is 100% correlated to the variable premium % employer.... 62 Table 15: We present below the multiple regression table, in which the dependent variable is the administrative costs per participant. All variables entered at the same time.... 64 Table 16: We present below the multiple regression table results for steps 1, 2 and 3 (independent variables entered one by one).... 66 Table 17: Table containing the potential variables extracted from the publicly accessible data set from the Dutch Central Bank.... 72
LIST OF ABREVIATIONS CBS: Dutch Central Bureau for Statistics CF: Capital Funded COLAs: Cost of Living Adjustments DB: Defined Benefit DC: Defined Contribution DCB: Dutch Central Bank EU: European Union GDP: Gross Domestic Product IMF: International Monetary Fund IPCA: Brazilian National Consumer Price Index OECD: Organization for Economic Cooperation and Development PAYG: Pay-As-You-Go PCFs: Brazilian Closed Complementary Pensions US: United States of America
INDEX 1 INTRODUCTION... 10 2 LITERATURE REVIEW... 11 2.1 PAY-AS-YOU-GO PENSIONS... 12 2.2 CAPITAL FUNDED PENSIONS... 14 2.3 PENSIONS IN THE NETHERLANDS... 15 2.3.1 The Dutch social-economic environment... 15 2.3.2 The Dutch pension system: 1 st pillar... 17 2.3.3 The Dutch pension system: 2 nd pillar... 18 2.3.4 The Dutch pension system: 3 rd pillar... 22 2.4 FORCES AFFECTING PENSION SYSTEMS... 22 2.4.1 Ageing... 22 2.4.2 Changing risk pattern... 26 2.4.3 Employment... 27 2.4.4 Sectorial decline... 28 2.5 MEASURES CHANGING PENSION SYSTEMS... 29 2.5.1 Global perspective... 29 2.5.2 Dutch perspective... 31 2.6 ADMINISTRATIVE COSTS... 32 2.6.1 Economies of scale... 33 2.6.2 Plan design... 34 2.6.3 Type of fund... 35 2.6.4 Participants... 36 2.6.5 Assets per participant... 37 3 METHODOLOGY... 38 3.1 GOAL... 38 3.2 DATA SAMPLE... 38 3.3 ANALYSIS... 39 3.4 LIMITATIONS... 39 4 ANALYSIS AND RESULTS... 40 4.1 ANALYSIS OF DESCRIPTIVE STATISTICS... 40
4.1.1 Administrative operating costs and scale economies... 40 4.1.2 Type of participants... 43 4.1.3 Premiums... 44 4.1.4 Assets and contributions... 46 4.1.5 Coverage ratio... 48 4.2 COMPARATIVE ANALYSIS: PRIOR DUTCH PENSION FUNDS RESEARCH... 49 4.2.1 Fund size... 50 4.2.2 Administrative Operating costs... 52 4.3 COMPARATIVE ANALYSIS: BRAZILIAN PENSION FUNDS... 55 4.3.1 Fund size... 55 4.3.2 Administrative operating costs... 57 4.4 FURTHER ANALYSES... 60 4.4.1 Scale economies... 60 4.4.2 Type of participants... 60 4.4.4 Assets and contributions... 63 4.4.5 Coverage ratio... 63 4.4.6 Regressions... 63 5 CONCLUSION... 66 6 REFERENCES... 68 7 APPENDIX... 72