Rent-Seeking in Private Pensions

Concentration, Pricing and Performance

Mark Hyde, Silvia Borzutzky

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN:
  9781137580344
• eBook ISBN:
  9781137580351
• Topic: Betriebswirtschaft
• Subtopic: Finanzdienstleistungen

This book argues that the implementation of compulsory, highly regulated, privately administered, defined contribution pensions facilitates rent-seeking behaviour on the part of the pension fund administrators and undermines the retirees' income and well-being. While the book focuses primarily on Chile, its analysis and conclusions are applicable to several Latin American and Eastern European countries where privately administered pension systems have been implemented. Chapters evaluate the scholarly literature and empirical evidence around three aspects of the pension fund industry: structure, pricing and performance. The authors conclude that state regulation has facilitated the accumulation of capital in the hands of the pension fund administrators. They also demonstrate that these systems owe more to the values and principles of conservative philosophy than to neoliberalism in providing alternative solutions to the rent-seeking approach to retirement.

© The Author(s) 2016

Mark Hyde and Silvia BorzutzkyRent-Seeking in Private Pensions10.1057/978-1-137-58035-1_1

Begin Abstract

1. A Global Revolution in Retirement Provision? Mandatory Defined-Contribution Pensions

Mark Hyde¹ and Silvia Borzutzky²

(1)

Plymouth Law School, University of Plymouth, Plymouth, UK

(2)

Heinz School, Carnegie Mellon University, Pittsburgh, USA

Abstract

Mainstream analysis of pension privatisation and compulsory fully funded retirement scheme defines these programmes as an extension of classical liberal political philosophy and emphasises consumer sovereignty, intensified competition, and market efficiency. We take issue with this widely shared characterisation of pension reform, highlighting its role in giving preferential treatment to the corporate actors responsible for managing private pensions. Chapter 1 conceptualises the perverse distributive impetus of privatisation, drawing on two traditions. Public choice theory has highlighted the prevalence of political rent-seeking—the pursuit of unearned income streams by lobbying government for market privileges. Simultaneously, the critique of state capitalism emphasises the government role in the protection of corporate interests. Political rent-seeking is illustrated with reference to Chile, the pioneer of compulsory fully funded pensions.

Keywords

Defined contribution pensionsPrivatisationNeoliberalismRent-seekingState capitalismChile

End Abstract

Introduction

The global pension landscape has changed enormously in recent decades, and this has profound implications for the future of retirement. From the late twentieth century onwards, there has been a substantial shift in favour of retirement provision that requires workers to take greater responsibility for their old age and to bear the risks of a failure to do so satisfactorily. Distinctive patterns of privatisation have ensured that the mandatory work-related pillar of the retirement system has increasingly manifested as defined-contribution (DC) provision, where people’s retirement prospects depend predominantly on the degree of their own saving, as well as the investment performance of their own financial assets. ¹ This contrasts with public and private defined-benefit (DB) schemes—such as those that DC provision has replaced—where scheme sponsors guarantee entitlements to a designated old-age income (Hyde et al. 2006; Orenstein 2008; Clark et al. 2012).

Any consideration of relevant cross-national comparative research would suggest that DC retirement provision became increasingly prevalent towards the end of the twentieth century, and beyond. A 2007 survey of pensions in 53 countries showed that 19 (or 36 percent) relied on a DC retirement scheme to deliver the compulsory work-related pillar, making this approach the second most prevalent form of such provision, globally (Whitehouse 2007). Looking only at the private sector, DC retirement schemes represented 86 percent of compulsory work-related pensions. This is echoed by a 2008 survey which showed that 34 countries had introduced mandatory private pensions: 26 countries (76 percent) embraced DC only, five (15 percent) adopted DB only, while three (9 percent) pursued both approaches (Hyde and Dixon 2010). We should also note the distinction between occupational defined-contribution (ODC) schemes, which are sponsored by employers on behalf of their own workers, and personal defined-contribution (PDC) schemes, which workers affiliate to individually with a bank, an insurance company, or, as is common, a pension fund manager designated by the state. ODC only was favoured by 17 countries (59 percent), PDC only was adopted in 10 countries (34 percent), while 2 countries (7 percent) embraced both approaches (see Table 1.1). Importantly, our findings suggest that a majority of mandatory DC schemes (21 or 62 percent) were concentrated in the countries of Central and Eastern Europe and Latin America. We should of course acknowledge that voluntary DC pension arrangements (typically manifesting as PDC schemes) operate across a range of national jurisdictions (Mitchell and Utkus 2004).

Table 1.1

An overview of existing mandatory DC pension arrangements

Country	Year introduced	Objective	Scheme type^a
Argentina	1994	Alternative	PDC
Australia	1992	Complementary	ODC, ODB
Bolivia	1997	Replacement	PDC
Bulgaria	2001	Complementary	ODC
Chile	1981	Replacement	PDC
Columbia	1994	Alternative	ODC
Costa Rica	2000	Complementary	ODC
Croatia	2002	Complementary	PDC
Denmark	2007	Alternative	PDC, ODC
Dom. Rep.	2003	Replacement	ODC
Ecuador	2002	Alternative	ODC
El Salvador	1998	Replacement	ODC
Estonia	2002	Complementary	ODC
Hong Kong	2000	Complementary	ODC
Hungary	1998	Complementary	PDC
Kazakhstan^b	1998	Replacement	PDC
Latvia	2002	Complementary	PDC
Macedonia	2003	Complementary	PDC
Mexico	1992, 1997	Replacement	ODC
New Zealand	2007	Complementary	PDC, ODC
Papua New Guinea	2000	Replacement	ODC
Peru	1991	Alternative	PDC
Poland	1999	Complementary	ODC
Slovenia	2001	Complementary	ODC
Sweden	1999	Complementary	ODC
Switzerland	1985	Complementary	ODC, ODB
Ukraine	2004	Complementary	ODC
UK	1988	Alternative	ODC, ODB
Uruguay	1996	Replacement	PDC

Source: Data collated from government departments responsible for the regulation of mandatory DC pensions

^aNotation: PDC personal defined-contribution scheme, ODC occupational defined-contribution scheme, ODB occupational defined-benefit scheme

^bDiscontinued in 2013

A measure of the growing prominence of DC provision is suggested by evidence of relative shares of pension fund assets or affiliates. It is clear from administrative data ² that the shares accounted for by mandatory DC pensions in particular countries have been very substantial indeed: for example, Australia (2005) (90 percent of assets), Denmark (2004) (97 percent of assets, 50 percent of members), New Zealand (2005) (53 percent of assets), Sweden (2003) (54 percent of affiliates), and the UK (22 percent of assets, 16 percent of affiliates). There is also evidence to suggest that the share of pension fund assets accounted for by DC retirement schemes in general is very substantial. In 2006, six countries—Australia, Canada, Japan, the Netherlands, the UK, and the USA—accounted for 92 percent of all work-related pension fund assets in the OECD, with a third held by DC schemes. The implications of evidence around this trend are clear, for if it continues, as seems likely, the ‘assets held in DC pension plans will eventually exceed those held in DB pension plans, making DC plans one of the largest institutional investors’ (Broadbent et al. 2006, p. 13). Governmental action has driven much of this shift, and this necessitates an adequate understanding of its role in shaping the retirement system.

The normative impetus of privatisation has of course been ambivalent. The introduction of mandatory DC provision has typically been justified with reference to the neoliberal arguments around freedom, economic efficiency, and consumer choice. The architects of privatisation argued that any retirement system which extends liberty intensifies competition on the supply side of the market, resulting in lower pension fund management charges, better returns for savers, and, by extension, improved benefits for retirees (Piñera 1996; Rodríguez 1999). At the same time, however, the regulation of such arrangements has been justified by its architects in terms of public interest concerns around ‘market failure’—such as investment risk or the possibility of retiree poverty (World Bank 1994; Thompson 1998). Yet the evidence of policy design, implementation, and outcomes would suggest that privatisation has failed to address these concerns satisfactorily. The discrepancy between the rhetoric of policy decision makers and the reality suggested by this evidence highlights the possibility of an undeclared but characteristic rationality of pension design that systematically redistributes financial resources from plan participants to pension fund managers. Drawing substantially on the insights of public choice theory (Tullock 1976; Gunning 2006), and the critique of state capitalism (Mills 1963; Kolko 1963; Shaffer 1997; Carson 2007), this monograph argues that privatisation has been intended to facilitate rent-seeking by the corporate agents responsible for managing DC pensions. In characterising mandatory DC retirement provision as a state-organised system of market privilege rent-seeking, it develops a detailed evaluation of the scholarly literature and empirical evidence around three aspects of the pension fund management industry—industry structure, pricing, and performance (Srinivas and Yermo 1997; Impávido et al. 2010).

Where mandatory DC pensions have replaced other forms of retirement provision, the state has typically introduced substantive measures that have curtailed market competition, enabling pension fund managers to impose excessive charges in return for the sub-optimal investment performance that they have been able to deliver. This stands in stark contrast to the values and principles of neoliberalism, particularly its emphasis on the importance of market efficiency. But it also contradicts the rhetoric of the public interest by failing to ensure that pension fund managers act in accordance with their fiduciary duty to plan participants rather than their own self-interest. In seeking to buttress the wealth, power, and authority of corporate elites, the design of mandatory DC pensions owes more to the values and principles of conservative political philosophy than neoliberalism, or notions of the public interest (Kolko 1963; Klein 2007). The monograph concludes by evaluating reforms that are able to eliminate or substantially curtail the incidence of rent-seeking in the retirement system.

Models of the State

Mandatory DC pensions are typically regarded as representing a free market alternative to public pensions (Rodríguez 1999; Shapiro 2007), but this characterisation is highly misleading. A detailed examination of its design attributes will show how the mandatory DC pension ‘market’ is shaped enormously by governmental action. Crucially, this means that the first and most important issue when appraising the organisation, role, and impact of any mandatory DC pension arrangement is the nature of the state apparatus that created it. Fundamentally, how does the political process represent people’s interests, and how does this impact on public policy decision making? Considered superficially, these questions might seem to verge on the eccentric since everyone knows that government exists to serve the people, but appearances can be deceptive.

A Public Inter...

Table of contents

• Cover
• Frontmatter
• 1. A Global Revolution in Retirement Provision? Mandatory Defined-Contribution Pensions
• 2. Structure: Concentration and Ownership in the Pension Fund Management Industry
• 3. Pricing: Management Charges in Mandatory DC Pensions
• 4. Performance: Investment Regulation and Returns in Mandatory DC Pensions
• 5. Conclusion
• Backmatter