Lecture Guest Econ 1101 The Market of Pension Fund Administrators in Peru
Presented by Manuel Macera
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Plan for this lecture
1. Introduction Pension Systems: preliminary concepts Description of the market 2. The case The market in Peru Collusion among firms? 3. Conclusions
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
1. Introduction
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Some Preliminary Concepts
What is the purpose of a Pension System? A pension system has as its main purpose to guarantee a source of income for the workers when they retire. People contribute while they are working and they receive a benefit later. Contributions are mandatory
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Some Preliminary Concepts
There are two ways of doing this 1. Pay as you go system The benefit received by the retired worker comes from contributions of current workers 2. Funded System The benefit received by the retired worker comes from contributions made by himself during his working years
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Some Preliminary Concepts
What are the main differences? PAY AS YOU GO Contributions constitute a common fund which is used to pay benefits. FUNDED Contributions constitute an individual account for each worker
1. Where does the money go? 2. How much the worker gets?
Your benefit when retired is Your benefit when retired previously known (defined depends on the financial return of benefit) your fund (defined contribution) Public managed. The government recollects the contributions In general Private managed and regulated by an ad hoc government agency.
3. Who manages the system?
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
A Description of the Market
When the system is privately managed, a market arises
1. What is being traded? Financial services. Not Goods! 2. What is the price charged? A percentage over worker's wages
3. Who are the consumers? Workers 4. Who are the suppliers? Firms
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
A Description of the Market
Example of a transaction You work and earn 1000 US$ monthly. Since you are in the labor market, you are obliged to contribute to the Pension System.
There are 4 firms in the market.
How to decide? What is important in order to make a good choice?
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
A Description of the Market
Example of a transaction You make your choice and go with Firm 1. By law, 8% of your wage is deposited in your individual account. On the top of that, the firm charges you a fee for collecting that money and administrating it. Let's say 2%. Total Income Contribution Fee Net Income 1000 -80 -20 900
Still your money!
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
2. The Case
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
A Description of the Market
During the 80's 90's, several Latin American countries reformed their pension system by creating a funded system operated by firms named Pension Fund Administrators, or just AFP's (Administradoras de Fondos de Pensiones) AFP's were created in Peru in 1993 and they were allowed to coexist with the financially broken Public System
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
The market in Peru
Policy makers had in their mind a gradual migration of people from public to private. They assumed that Funded System would be more attractive as they would offer a market return for workers' contributions They were expecting to observe low fees in the market since firms somewhat would compete through prices.
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
The market in Peru
Competition through prices What would happen then? This would lead to Marginal Cost Pricing. So if the about expectations the market performance were correct we must end up very close to the competitive market outcome (Point B).
P S A P
M
P*
B
MR D QM Q* Q
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
The market in Peru
Competition through prices What really happened? People observed high prices (fees), high markups. Some started to suggest that the market outcome was very close to be monopolistic.
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
The market in Peru
Competition through prices What really happened? People observed high prices (fees), high markups. Some started to suggest that the market outcome was very close to be monopolistic.
P S A PM P* B AT C
MR D QM Q* Q
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Collusion among firms?
How can we explain this outcome? Small number of firms. Being so few, firms could ask themselves why to compete. They are better off by not doing so.
Splitting the monopolistic pie is better than competing.
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Collusion among firms?
We can think of the following game for two firms that consider to constitute a cartel:
Firm 2
Low price Low price (10 ; 10) (8 ; 15) H igh price (15 ; 8) (12 ; 12)
Firm 1
H igh price
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Collusion among firms?
If this game is played once, any firm is better by deviating.
If this game is played forever...
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Collusion among firms?
Firms can agree in a policy of high fees. The most beneficial outcome would be sustained in the long run Collusion is illegal! But... was there an explicit agreement on pricing policy? Besides... Is it so easy to collude?
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Collusion among firms?
Expensive Services Fees were said to be high in comparison with other countries. Firms argued that the reason for that was the size of the market (Scale Economies)
Average cost will remain high as long as the number of potential contributors is small.
The coexistence of the public system didn't help
ECON 1101: Guest Lecture
The Market of Pension Fund Administrators in Peru
Collusion among firms?
Firm's Behavior is too similar Was it so surprising? Whose fault is that? a. Firms can ...