Abstract
Abstract Previous literature has reported that pension funds sponsored by public organizations present greater administrative expenses when compared to similar pension funds sponsored by private organizations. We investigate this sponsor bias, hypothesizing that it may originate from the omission of relevant control variables, specifically variables for location of headquarters and the level of outsourced services. We test this hypothesis by linear regression in the cross-section of 164 Brazilian closed pension funds, using annual data from 2010 to 2014. We find that these control variables partly explain the sponsor bias, especially for medium-size pension funds, and when the sponsor is an organization related to a state or municipal government. We also hypothesize that political bias may increase administrative expenses of public sponsor pension funds, especially in election years. We test this hypothesis by panel regression using a fixed effects method and did not find statistically significant changes in administrative expenses in election years. Our findings do not support the hypothesis of political bias in administrative expenses of Brazilian closed pension funds. On the contrary, we present evidence that the sponsor bias may be driven by characteristics of the pension funds omitted in previous literature.
Highlights
The importance of pension funds grows as populations age
In a simulation performed by Bikker and De Dreu (2009), if annual administrative expenses increase from 1% to 2% of total fund assets, retirement income may drop around 25%
Previous literature (Abi-Ramia, Boueri, & Sachsida, 2015; Bikker et al, 2012) reported that pension funds with public organizations as sponsors present greater administrative expenses. We investigated this sponsor bias, and presented evidence that it may be attributed, at least partially, to omitted variables, variables to control for location and the level of services outsourcing by the pension funds
Summary
Pension values depend directly on the net return obtained on pension fund assets. In a simulation performed by Bikker and De Dreu (2009), if annual administrative expenses increase from 1% to 2% of total fund assets, retirement income may drop around 25% (assuming 5% of annual real rate of return). The literature concerned with pension fund administrative expenses has two main goals. One goal is to identify potential scale economies, as in Caswell (1976). If there are economies of scale, merging pension funds may be beneficial to participants. The other goal related to pension fund administrative expenses is concerned with the factors that drive them, as in Bikker, Steenbeek and Torracchi (2012), that investigate the effect of plan characteristics. In this study we develop the second approach, dissecting previous findings
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call