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The effects of risk aversion and density of contribution on comparisons of administrative charges in individual account pension systems

Published online by Cambridge University Press:  26 April 2016

LUIS CHAVEZ-BEDOYA
LUIS CHAVEZ-BEDOYA*
Affiliation:
Department of Finance, Esan Graduate School of Business, Lima, Peru (e-mail: lchavezbedoya@esan.edu.pe)
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Abstract

This paper studies the effects of risk aversion and density of contribution (DoC) on comparisons of proportional charges on flow (contributions) and balance (assets) during the accumulation phase of a defined-contribution pension plan in a system of individual retirement accounts. If the participant's degree of risk aversion increases and both charges yield the same expected terminal wealth, then the charge on balance improves with respect to the charge on flow when performing comparisons that examine the ratio between the resulting expected utilities of terminal wealth. When this methodology is applied to the Peruvian Private Pension System, empirical results demonstrate that the aforementioned result also holds for arbitrary charges on flow and balance and that the effect of DoC on these comparisons is nearly negligible for most of the assessed scenarios.

Keywords

G23Pension funddefined-benefitindividual accountcharge on balancecharge on flowdensity of contributionadministrative feesadministrative charges
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Issue 1 , January 2017 , pp. 1 - 20
Copyright
Copyright © Cambridge University Press 2016 

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