Are there cost differences in the Argentinean pension fund industry?

GUSTAVO FERRO Y CARLOS A. ROMERO

Working Paper Series CEER/UADE

CEER/UADE

Lugar: Buenos Aires, Argentina; Año: 2008 p. 1 - 16

The purpose of this study is to determine the existence of differences in costs between pension fund administrators (PFAs) by the estimation of an econometric cost frontier for Argentina. Like in other eleven Latin American, and some other Central Asian and Eastern Europe countries, the social security has been privatized, and the individual accounts of defined contribution plans are managed by PFAs. The issue is relevant because of its potential regulatory implications. Cost savings (efficiency gains) could be pass-through to contributors, enhancing its pension funds (that is, its pension once they retired). The concept is applied in utilities’ regulation in countries where price-caps are applied, and an X-factor is set by the regulator to socialize the efficiency gains, but it is not the practice in privatized social security systems. In Argentina a price-cap has been introduced in pension funds markets since a 2007 reform. It allows the regulator to modify that cap, but in doing that no provision was established for a technically acceptable methodology. The use of efficiency frontiers provides a technical tool to help in that key resource allocation decision. In the estimates, it is found that there are important differences in efficiency among PFAs. This gives some clues to the regulator for implementing sector policies.