Determinants of pension plan fees in Spain

Abstract

Pension plans and funds represent a substantial part of the welfare systems in both Europe and Spain. One of the most important factors in the choice of a plan or fund is the performance it obtains. In view of the influence that fees have on performance, the objective of this study is to analyse the variables that determine the management and custodial fees of individual pension plans. The Spanish market for pension plans and funds sets legal caps on these fees, and at the same time the majority of them are commercialized and managed by financial institutions, which can in turn generate a conflict of interests. In this article, we estimate models with censured variables and our findings show how the average investment per plan, the legal status and the size of the management company to which the plan belongs, and the style of the plan are all relevant determinants of the management fee. In turn, the custodial fee is determined by the legal status of the custodial company, the size, the return and the type of plan.

Acknowledgement

This study is part of the research project SEJ2007-67204, financed by the Spanish Ministry of Science and Technology sub-programme Eco and the research project GV/2007/097 financed by the Generalitat Valenciana and the Bancaja Programme P1.1B2006-16. The work has also been awarded an FPI grant co-financed by the Dirección General de Universidades e Investigación de la Generalitat Valenciana and the European Social Fund. The authors would like to thank both INVERCO and Net Pensiones for kindly making their data available.

Notes

¹ Occupational pension plans can be either defined contribution plans or defined benefit plans; however, current Spanish regulations on pension plans and funds only allow defined contribution plans in the case of individual pension plans.

² Newey (1987) recommends using the Hausman test to compare Tobit estimations with CLAD estimations.

³ Note that in our analysis of data from 30 April 2005, we considered the maximum limit established in Royal Decree 1307/1988 of 0.6% of the annual nominal value of the custodied assets, as the current Regulations approved by Royal Decree 304/2004, which came into force on 26 February, allows for the retention of fees negotiated prior to the date the new legal framework was introduced, in certain circumstances.