The efficiency of pension fund managers in Latin America

This paper provides an outline of the main features of the new pension fund management market established by pension reform and explains the focus on the efficiency of the new pension fund managers and identifies the key issues for analysis. It outlines data envelopment analysis and discusses its appropriateness to the study of pension fund managers and presents estimated measures of efficiency of pension fund managers in Chile and discusses their implications.

Findings include:

• whilst competition in the pension fund management market in Chile is limited, regulation is to an important extent responsible for the mixed performance of fund managers
• current regulation allows a misalignment of costs and commission charges, making it possible for some fund managers to pursue market strategies which contribute to market inefficiency. This is a product of the limited nature of competition in the pension market, regulation, and the rent seeking practices of both pension fund managers and affiliates
• whilst economies of size imply the average costs of providing services in the pension market decline in contributory earnings, the majority of commission revenue comes from earnings related commission charges. In addition, marketing policy by the pension fund managers has concentrated commission charges on regular contributors to individual retirement accounts, instead of the wider universe of users. Commission charges therefore have only an indirect relationship to service costs
• the pension fund management market in Chile suffers from significant inefficiency
• comparison of efficiency scores for individual pension fund managers over time shows that market stayers have higher efficiency scores compared to market leavers, thus suggesting that competition works, albeit imperfectly, over time, but there are important exceptions to this finding
• increased market share contributes positively to market efficiency. Sales and marketing costs, on the other hand, are detrimental to market efficiency. This is consistent with the view that a key problem in the operation of the pension market is the misalignment of commissions charged with the costs of the services provided. The misalignment of costs and commission charges leads to inefficient market outcomes, with adverse implications for future pension outcomes