Governance, Decision-Maker and Fee Setting in the Pension Plan Industry

Abstract

The impact of a switch of management company on pension plan fees is analyzed by comparing the effects on employer-sponsored versus individual defined-contribution private pension plans in Spain. This framework is ideal because the two types differ significantly both in plan governance structure and in the degree of bargaining power held by the decision-makers. In addition, intense bank restructuring, which has greatly modified the Spanish pension plan map, provides an interesting analytical context for the identification of causal links, because it is a scenario that features shocks exogenous to the relationship under analysis. The results show that a switch of management company significantly reduces management fees for employer-sponsored plans, where the nature of the governance structure aligns plan objectives more closely with those of the investors and improves their bargaining power, while the reverse is true for individual pension plans. As expected, diff-in-diff analysis reveals significant differences in employer-sponsored plans when the change of management company is due to factors exogenous to the management-client relationship, such as repercussions from the bank restructuring process. This effect is not observed in individual plans, however.