Disclosure, hidden charges and indexed pensions

Article


Beal, Diana, Delpachitra, Sarath and Grundy, Bruce. 2005. "Disclosure, hidden charges and indexed pensions." Agenda: a journal of policy analysis and reform. 12 (1), pp. 33-46.
Article Title

Disclosure, hidden charges and indexed pensions

ERA Journal ID40194
Article CategoryArticle
AuthorsBeal, Diana (Author), Delpachitra, Sarath (Author) and Grundy, Bruce (Author)
Journal TitleAgenda: a journal of policy analysis and reform
Journal Citation12 (1), pp. 33-46
Number of Pages14
Year2005
Place of PublicationCanberra, Australia
ISSN1322-1833
1447-4735
Web Address (URL)http://epress.anu.edu.au/agenda/012/01/12-1-A-1.pdf
Abstract

This paper analyses the cash flows of lifetime indexed pensions as one source of apparent super-profitability in the funds management industry. We conclude that, in practice, the difference between the amount paid for the pension and the present value of the pension income is huge - around 30% of the amount paid for the pension. With most products, the funds-management industry takes clients' funds, invests to the best of its ability and charges fees for those management services. Risk is borne by the clients. Lifetime indexed pensions are an exceptional product, where managers bear more aspects of risk. Naturally, there must be a payment or reward for bearing risk, but the size of that reward vis-a-vis the incidence of risk is open to question. More importantly the reward is, at present, substantially undisclosed. The next section of the paper describes lifetime indexed pensions and reports a small market survey conducted by the authors, while the next section reports the methodology used and analyses cash flows. The following section argues some possible rationalizations that may be proposed by financial institutions to justify the undisclosed 'fees' while the final section discusses policy issues and proposes minimal disclosure requirements.

Keywordsretirement; disclosure; hidden charges; indexed pensions
ANZSRC Field of Research 2020440305. Population trends and policies
380199. Applied economics not elsewhere classified
380107. Financial economics
Public Notes

File reproduced in accordance with the copyright policy of the publisher/author.

Byline AffiliationsDepartment of Finance and Banking
School of Accounting, Economics and Finance
University of Melbourne
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