Are There Cost Differences in the Argentinean Pension Fund Industry? An Efficiency Frontier Analysis

The purpose of this paper is to study the existence of differences in costs between pension fund administrators (PFAs) through 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 passed-through to contributors, increasing their pension funds (that is, their pensions at retirement). The concept is applied to utilities’ regulation in countries where price-caps are applied, and an X-factor is set by the regulator to distribute 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. Though it allows the regulator to modify that cap, in doing that no provision was established for a technically acceptable methodology. We show that the use of efficiency frontiers could fill the gap, because it provides a technical tool to help in that key resource allocation decision. From the empirical work, it is found that there are important differences in efficiency among PFAs. This gives some clues to the regulator for implementing sector policies.