Fees charged to members of defined contribution plans
Pension providers charge fees to members to cover their operating expenses for running pension plans. Most countries cap fees, generally fees on assets, which can be charged to members. In some countries, the actual amount of fees levied on assets is close to this cap (such as in Costa Rica and the Czech Republic) while in some others, the cap does not seem too binding as pension providers charge less (such as in Estonia and Hungary). Other initiatives to reduce the fees charged by the industry include auction mechanisms based on fees such as in Chile and in New Zealand (along with other criteria).
Pension providers charge fees to their members to cover their operating expenses. Operating expenses include marketing the plan to potential participants, collecting contributions, sending contributions to investment fund managers, keeping records of accounts, sending reports to participants and supervisors, investing the assets, converting account balances to benefit payments, and making these payments.
Pension providers charge fees to members in different ways depending on the country. Fees can be charged on contributions or on salaries directly (e.g. Colombia), on assets (e.g. Estonia), on performance, or a combination (e.g. the Czech Republic where pension funds can charge fees on assets and profits). On top of regular fees, members in some countries can be charged fees when they join, switch or leave a pension provider (e.g. Hungary, the Czech Republic).
Most countries – 17 out of 22 reporting OECD countries – capped some of the fees that pension providers can charge to members. Most of these 17 countries capped fees on assets, which is one of the most widespread way for pension providers to charge members. Some have been lowering their cap on fees recently to reduce the fees charged by the industry. For instance, Costa Rica has been reducing the maximum fees on assets for the mandatory ROP system to reach 0.35% in 2020. In Estonia, the management fee for second pillar pension funds must decline by 10% after each EUR 100 million of assets under management since 2015, and since 2 September 2019, the cap for management fees became 1.2% for all pension funds (while before, the cap was 1.2% for conservative funds only, 2% for the other funds). However, Estonia also introduced a performance fee for all funds except conservative ones, on top of the basic fee, in 2019.
The actual level of fees charged to members, aggregated at the national level and expressed as a percentage of total pension assets, can be compared to the cap in the legislation when fees are precisely levied on assets. For instance, pension providers charged fees on assets near or as high as the cap in Costa Rica (cap at 0.35%) and the Czech Republic (cap at 0.8% for transformed funds that are the main type of funds in the country). The choice of the level of the cap is therefore important but challenging. If the cap is too high, charges may rise to the level of this cap. If the cap is too low, pension providers may try to lower costs and could lower the quality of the services they provide. In some other countries, pension providers charge less on assets than the cap (which may not be binding), such as 0.6% in Estonia (with a cap at 1.2% for the second pension pillar and no cap for the third pension pillar), and 0.3% in Hungary (with a cap at 0.8%).
Other initiatives to reduce the fees charged by the industry include auction mechanisms based on fees such as in Chile and New Zealand (along with other criteria). Pension providers in Chile bid on fees charged to members. The winning pension provider receives all new eligible entrants. In New Zealand, default providers are selected based on a range of selection criteria that include fees. These mechanisms intend to drive fees down.
Definition and measurement
The term “retirement savings plans” refers to private pension arrangements (funded and book reserves) and funded public arrangements (e.g. ATP in Denmark).
The actual level of fees charged to members, aggregated at the national level, is difficult to compare across countries for multiple reasons. First, the aggregated amounts of fees could be the result of many factors, including the fee structure and the maturity of the system. These aggregated amounts, shown at a given point in time, do not reflect the amount of fees that individuals bear over their lifetime nor how expensive DC plans are from the perspective of members whatsoever. Second, fees may pay for different levels of services across countries and should be examined in light of these services and of the value they generate for plan members. Third, some indirect charges that reduce the pension pot of plan members may also still need to be uncovered and disclosed for some countries, and would therefore not be accounted for in the currently available data on fees for these countries.