AFP operating costs and fees have declined significantly in the past 20 years, but still remain high. In 2007-2008, total fees amounted to 1.0-1.3 percent of assets, including fees of about 64 basis points paid to foreign asset managers.<sup>27</sup> Fees paid by pension funds to international mutual funds have decreased from about 100 basis points in 2003 to about 64 basis points in 2009. By comparison, the average costs of US occupational pension funds of similar size are about 0.5 percent of assets. The average fees of US mutual funds of similar size are about 1 percent of assets, but these include equity funds with high turnover. Bond funds and equity funds with low turnover have much lower fees.<sup>28</sup> These figures indicate that there is still scope for reducing operating fees, costs and profit margins in the AFP sector.

The 2008 amendments to the law required that new entrants should be allocated to the pension fund that levies the lowest fees. In January 2010, through an open bidding process, the Pension Supervisory Agency selected the AFP that offered to charge the lowest fee to its contributors. This was approximately 24% lower than the weighted average of the fees charged by the AFP industry.

The AFP market has generally performed better for PW holders than for active contributors, because pensioners earn the same rates of return as active workers in the 3 portfolios where they are allowed to invest, but are charged much lower fees. Although the multi-funds regime, created in 2002, allowed active workers and PW holders to choose among 5 and 3 different portfolios, the 2008 amendments to the law allow retirees with higher expected retirement income to choose among the 5 pension funds as well. At the same time, PW holders are charged much lower fees for the management of their accounts. AFPs do not maintain a sales force for the promotion of PWs and charge a fee of only 1 percent on PW benefits paid, an amount that is designed to cover just marginal administration costs. AFPs have been able to generate high returns on equity, but these returns are derived from the accumulation phase, not the payout phase.<sup>29</sup>

# **3.4 The Performance of Annuities and Money's Worth Ratios**

Assessing market performance in the annuity market involves the use of more elaborate indicators, given the different nature of annuity contracts and their very long duration. One indicator that is commonly used is the money’s worth ratio (MWR), defined as the ratio of the expected present value of benefit payments to the annuity premium. This indicator measures how much the annuitant receives back for the premium paid. A ratio equal to one is usually interpreted as an actuarially fair annuity. Table 12 provides information on MWRs for all annuities issued in March 1999, 2002, 2003, 2004 and 2005.

> 27 As a consequence of excessive charges paid by pension funds on international mutual funds in the past, the regulation requires these fees to be reported regularly.

> 28Collins (2003) and the Investment Company Institute (2004) provide a detailed analysis of costs and fees of pension and mutual funds in the US.

> 29 The 2008 amendments to the law allow pension advisors to charge a commission for advising the retirees to take PWs.

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