The effects of risk aversion and density of contribution on comparisons of administrative charges in individual account pension systems

Abstract

This paper studies the effects of risk aversion and density of contribution (DoC) on comparisons of proportional charges on flow (contributions) and balance (assets) during the accumulation phase of a defined-contribution pension plan in a system of individual retirement accounts. If the participant's degree of risk aversion increases and both charges yield the same expected terminal wealth, then the charge on balance improves with respect to the charge on flow when performing comparisons that examine the ratio between the resulting expected utilities of terminal wealth. When this methodology is applied to the Peruvian Private Pension System, empirical results demonstrate that the aforementioned result also holds for arbitrary charges on flow and balance and that the effect of DoC on these comparisons is nearly negligible for most of the assessed scenarios.

Choice of Pension Management Fees and Effects on Pension Wealth.

“…Other studies analyze the effects of fees in compulsory IRA systems on pension wealth, such as Whitehouse (2001), Alonso et al (2014), Aguila et al (2014) and Chávez-Bedoya (2017).…”

“…However, they only compute the mechanical effect of the change in fees on the specific example of a 40-year-old worker. Chávez-Bedoya (2017) discusses the theoretical implications of both the density of pension contributions and risk aversion on the final level of individual pensions for different schemes of management fees. He illustrates his predictions with parameters of the Peruvian IRA system.…”