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Toward better regulation of private pension funds


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  • Shah, Hemant
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    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.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1791.

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    Date of creation: 30 Jun 1997
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    Handle: RePEc:wbk:wbrwps:1791

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    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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    1. Vittas, Dimitri & Iglesias, Augusto, 1992. "The rationale and performance of personal pension plans in Chile," Policy Research Working Paper Series 867, The World Bank.
    2. Valdes-Prieto, Salvador, 1994. "Administrative charges in pensions in Chile, Malaysia, Zambia, and the United States," Policy Research Working Paper Series 1372, The World Bank.
    3. Valdes-Prieto, Salvador & DEC, 1994. "Earnings-related mandatory pensions : concepts for design," Policy Research Working Paper Series 1296, The World Bank.
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    Cited by:
    1. World Bank, 2005. "Household Risk Management and Social Protection in Chile," World Bank Publications, The World Bank, number 14839, August.
    2. Emma Aguila & Michael D. Hurd & Susann Rohwedder, 2008. "Pension Reform in Mexico: The Evolution of Pension Fund Management Fees and their Effect on Pension Balances," Working Papers, University of Michigan, Michigan Retirement Research Center wp196, University of Michigan, Michigan Retirement Research Center.
    3. Pecchenino, R.A. & Pollard, P.S., 1999. "Government Mandated Private Pensions: A Dependable Foundation for Retirement Security?," Papers, Michigan State - Econometrics and Economic Theory 9902, Michigan State - Econometrics and Economic Theory.
    4. Aiyer, Sri-Ram, 1997. "Pension reform in Latin America : quick fixes or sustainable reform?," Policy Research Working Paper Series 1865, The World Bank.
    5. Whitehouse, Edward, 2000. "Administrative charges for funded pensions : an international comparison and assessment," Social Protection Discussion Papers 23140, The World Bank.
    6. Eduardo Siandra, 1998. "Sistemas de pensiones, sus reformas y los mercados de capitales," Documentos de Trabajo (working papers), Department of Economics - dECON 0299, Department of Economics - dECON.
    7. Ben Braham, Mehdi, 2004. "L’avenir des retraites en Tunisie : Leçons des expériences étrangères," Economics Papers from University Paris Dauphine 123456789/6253, Paris Dauphine University.
    8. Srinivas, P.S. & Whitehouse, Edward & Yermo, Juan, 2000. "Regulating private pension funds’ structure, performance and investments: cross-country evidence," MPRA Paper 14753, University Library of Munich, Germany.
    9. Whitehouse, Edward, 2000. "Paying for pensions: An international comparison of administrative charges in funded retirement-income systems," MPRA Paper 14171, University Library of Munich, Germany.
    10. Vittas, Dimitri, 2002. "Policies to promote saving for retirement : a synthetic overview," Policy Research Working Paper Series 2801, The World Bank.
    11. Eduardo Siandra, 1999. "La inversión extranjera de los fondos de pensiones y el desarrollo del mercado de capitales doméstico," Documentos de Trabajo (working papers), Department of Economics - dECON 0599, Department of Economics - dECON.
    12. Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
    13. World Bank, 2000. "Nicaragua : Pension Reform Proposal," World Bank Other Operational Studies 14972, The World Bank.


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