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SSRN Electronic Journal
Article . 1997 . Peer-reviewed
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Toward Better Regulation of Private Pension Funds

Authors: Shah, Hemant;

Toward Better Regulation of Private Pension Funds

Abstract

The author analyzes the typical model for regulating investments in private pension funds. Pension reforms like those pioneered by Chile are being initiated or considered in Argentina, Bolivia, China, Colombia, Costa Rica, Hungary, Mexico, Peru, Uruguay, and elsewhere. Such reforms greatly improve fiscal discipline, make social security benefits and burdens equitable, and deepen financial markets. But they are also typically accompanied by: tight restrictions on the investments in pension fund portfolios; restrictions on the management of mandated retirement savings (to newly created legal entities called pension administrators, to the exclusion of such financial intermediaries as banks and mutual funds); minimum-return guarantees from the state and/or pension funds; and commissions based on salary rather than on the volume of assets managed. Illustrating his conclusions with case studies from Chile and Peru, the author shows that these restrictions, though well-meant, are poorly justified by financial theory, distort incentives for competition based on product choice and efficiency, increase administrative costs, and seriously reduce the affiliates'appropriate risk-return choices and returns. And the resulting potential losses in retirement income are great. The author recommends a significant departure from the Chilean-style model of a private pension fund system. He briefly describes implementation and transition issues for the alternative system that he proposes, which would: permit diverse intermediaries -including banks and mutual funds that meet appropriate prudential standards- to manage retirement savings; allow a greater choice between investment products; require that returns be reported on a net basis; and charge commissions as a fraction of assets managed.

Keywords

Payment Systems&Infrastructure,Economic Theory&Research,International Terrorism&Counterterrorism,Environmental Economics&Policies,Insurance&Risk Mitigation,Pensions&Retirement Systems,Environmental Economics&Policies,Insurance&Risk Mitigation,Banks&Banking Reform,Economic Theory&Research

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    influence
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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
20
Average
Top 10%
Average
bronze