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Regulating private pension funds’ structure, performance and investments: cross-country evidence

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  • Srinivas, P.S.
  • Whitehouse, Edward
  • Yermo, Juan

Abstract

A number of countries have introduced individual, privately managed defined-contribution accounts, where the value of the pension benefit will depend on accumulated contributions and investment returns. These schemes expose workers’ future pension benefits to a number of different risks. To try to mitigate these risks, reforming governments have often strictly regulated the pension fund management industry’s structure, performance, and asset allocation. Structural regulations often force workers to choose only one manager and one fund. So, workers are unable to diversify investments across funds, exposing them to aberrant behaviour by fund managers, and preventing portfolio adjustments according to the individual’s age, household characteristics, career profile and attitude to risk. Strict asset-allocation rules and relative performance criteria mean that pension funds often invest and perform almost identically, removing any substantive choice for workers over the allocation of their pension fund’s assets and the portfolio’s risk and returns. Concentration in the pension fund management industry is found to be higher in the new pension systems of Latin America and Eastern Europe than in most OECD countries. Concentration might be because the new pension markets are smaller than in countries with more established funded pension systems, but it could also be because of restrictions on industry structure. In Latin America, asset allocation and performance is nearly identical across pension funds. So-called ‘herding’ behaviour is almost a defining characteristics of these pension regimes. Again, this reflects, at least in part, asset allocation restrictions and strict performance regulation. There is also evidence that pension funds have often under-performed simple portfolios composed of market indices of stocks and bonds. All the rules imposed in the new systems of Latin American and Eastern Europe seem to be more stringent than in the OECD, with one exception: portfolio limits. Some OECD countries have a tighter investment regime than countries such as Argentina, Chile, Colombia, Peru and Poland. But OECD countries tend to have fewer barriers to entry and impose fewer constraints on performance than Latin American and Eastern European countries.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14753.

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Date of creation: Jul 2000
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Handle: RePEc:pra:mprapa:14753

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Keywords: pensions; portfolios; investments;

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References

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Citations

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Cited by:
  1. Dayoub, Mariam & Lasagabaster, Esperanza, 2008. "General trends in competition policy and investment regulation in mandatory defined contribution markets in Latin America," Policy Research Working Paper Series 4720, The World Bank.
  2. Luciano Greco, 2005. "The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment," "Marco Fanno" Working Papers 0003, Dipartimento di Scienze Economiche "Marco Fanno".
  3. Senderski, Marcin, 2014. "Assessing the strictness of portfolio-related regulation of pension funds: Rethinking the definition of prudent," MPRA Paper 56610, University Library of Munich, Germany.
  4. Diego Jara, 2006. "Modelo de la regulación de las AFP en Colombia y su impacto en el portafolio de los fondos de pensiones," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, BANCO DE LA REPÚBLICA - ESPE.
  5. Pereda Javier, 2007. "Estimación de la Frontera Eficiente para las AFP en el Perú y el Impacto de los Límites de Inversión: 1995-2004," Working Papers, Banco Central de Reserva del Perú 2007-009, Banco Central de Reserva del Perú.
  6. Diego Jara, . "Modelo de la Regulación de las AFP en Colombia y su Impacto en el Portafolio de los Fondos de Pensiones," Borradores de Economia 416, Banco de la Republica de Colombia.
  7. Darlene Himick, 2009. "Accounting and Chilean pension reform," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, Emerald Group Publishing, vol. 22(3), pages 405-428, April.
  8. Castaneda, Pablo, 2006. "Long Term Risk Assessment in a Defined Contribution Pension System," MPRA Paper 3347, University Library of Munich, Germany, revised 30 Apr 2007.
  9. Jorge Roldos, 2007. "Pension Reform and Macroeconomic Stability in Latin America," IMF Working Papers 07/108, International Monetary Fund.
  10. Boon, Ling-Ni & Brière, Marie & Gresse, Carole & Werker, Bas J. M., 2013. "Regulatory Environment and Pension Investment Performance," Economics Papers from University Paris Dauphine 123456789/13629, Paris Dauphine University.
  11. Mosolygó, Zsuzsa, 2010. "A tőkefedezeti rendszer alapkérdéseinek új megközelítése
    [A new approach to the basic issues raised by the PAYE system]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 612-633.

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