The effects of management fees on pension wealth

We study a policy change on pension fund management fees implemented in Peru in 2013 to shed light about the potential effects of this type of policy on pension wealth. The reform established a new balance fee charging a percentage of the pension balance (the default) unless the individual opted for remaining in the load factor fee that charges a percentage of the salary. We use administrative data to simulate pension balances taking into account the individual’s actual fee scheme and the corresponding counterfactual if the individual had chosen the other scheme. Our results indicate that the reform has been potentially adverse for 63.8 percent of individuals. This figure is composed of 40.4 percent of affiliates who fall into the default and 23.4 percent who voluntary chose remaining in the load factor fee,which may suggest an alarming lack of soundness in individual financial decisions and ill-designed policy. We also detect large heterogeneity in the intensity of losses and gains due to the reform, being the size of losses larger than the size of gains. In particular, the younger and poorer individuals and those falling into the default option show higher losses. Moreover, the change of fee scheme is also associated with increasing inequality of pension wealth and a reduction on individual’s well-being.