A Cost Frontier For Pension Funds in Argentina

During the last decade, Argentina has faced an extended process of reform of the Pension System. It had been implemented a mixed system with a private funds scheme (PFS) and a new public pay-as-you-go system. The PFS was based on personal contributions; it addressed the effect of demographic changes improving age of retirement, and determined a defined contribution scheme plus a universal minimum public benefit. However, the experience shows that the PFS has high social costs, especially in wasteful marketing, and that the pension fund administrators (PFA) do not share the pressure of a competitive environment because regulations tend to generate similar portfolios. The first aim of this paper is to estimate efficiency levels among PFA, using information from the actual management of PFA, and to argue that a new reform, if is it such the case, should be focused in the regulatory body. In this sense, a social planner concerned with the goal of maximizing the value of future pensions has to work in diminishing the commercial costs of the system, in inducing a better portfolio management, and in forcing less artificial product differentiation related to “client service”. Besides these aspects, in 2001 Argentina has suffered a strong macroeconomic crisis, with severe social impact, that ended with a huge devaluation at the beginning of 2002. This crisis has affected mainly the pension funds, and consequently the income of future retirees, because public bonds were (and still are) the most important part of the portfolio. Public debt was defaulted, and the former securities were replaced for new ones in a swap operation with a 40% “haircut”. Then, a second objective is to evaluate the relative efficiency taking into account the effect of the crisis. We found that there is not a significant change in efficiency since the initial reform. Moreover, we show that the macroeconomic crisis could not be considered a reason for this result, because its effects were transient.