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Assessing Alternative Institutional Designs For Investment Regulation In Defined Contribution Pension Funds

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  • EDUARDO WALKER

    ()
    (Escuela de Administración,Pontificia Universidad Católica de Chile)

Abstract

This article provides a stylized framework to assess alternative institutional designs for investment regulation, in the context of mandatory defined contribution pension fund systems with individual accounts and competition among managers. We illustrate short-term, long-term and competitive risk-return frontiers, visualizing the differences in perspectives and incentives. We identify a potential “inefficiency trap”, meaning that if the benchmark is inefficient there will be no obvious incentives to move portfolios towards the frontier. We also argue that ceteris paribus competitive incentives will move managers to take more risk, either gradually or abruptly, with no obvious limits to this. We then discuss different institutional arrangements that could help in moving asset allocations towards efficient positions and to mitigate risk-taking incentives: minimum required absolute returns; maximum allowable short-term absolute risk; maximum allowable long-term absolute risk; and minimum returns relative to exogenous or endogenous benchmarks. We conclude that a setting with partially exogenous benchmarks and minimum return bands may constitute one of the better policy alternatives, despite its own limitations.

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Bibliographic Info

Article provided by Escuela de Administracion. Pontificia Universidad Católica de Chile. in its journal ABANTE.

Volume (Year): 11 (2008)
Issue (Month): 2 ()
Pages: 121-152

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Handle: RePEc:pch:abante:v:11:y:2008:i:2:p:116-148

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Web page: http://eacc10.puc.cl/RePEc/pch/
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Related research

Keywords: defined contribution; pension funds; regulation; incentives; portfolio management;

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  1. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
  2. Varas, Felipe & Walker, Eduardo, 2011. "Optimal close-to-home biases in asset allocation," Journal of Business Research, Elsevier, vol. 64(3), pages 328-337, March.
  3. Rodrigo Cerda, 2006. "Movilidad en la Cartera de Cotizantes por AFP: La Importancia de ser Primero en Rentabilidad," Documentos de Trabajo 309, Instituto de Economia. Pontificia Universidad Católica de Chile..
  4. Isabelle Bajeux-Besnainou & James V. Jordan & Roland Portait, 2003. "Dynamic Asset Allocation for Stocks, Bonds, and Cash," The Journal of Business, University of Chicago Press, vol. 76(2), pages 263-288, April.
  5. Thompson, Graeme, 2008. "Risk-based supervision of pension funds in Australia," Policy Research Working Paper Series 4539, The World Bank.
  6. Campbell, John Y & Viceira, Luis M, 2005. "The Term Structure of the Risk-Return Tradeoff," CEPR Discussion Papers 4914, C.E.P.R. Discussion Papers.
  7. Livio Stracca, 2006. "Delegated Portfolio Management: A Survey Of The Theoretical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 823-848, December.
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