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Upgrading investment regulations in second pillar pension systems : a proposal for Colombia

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  • Castaneda, Pablo
  • Rudolph, Heinz P.

Abstract

The passivity of the demand for pension products is one of the striking features of mandatory pension systems. Consequently, the provision of multiple investment alternatives to households (multifund schemes) does not ensure that contributions are invested efficiently. In addition, despite the theoretical findings that short term return maximization is not conductive to long-term return maximization, the regulatory framework of pension fund management companies puts excessive emphasis on short-term maximization. Therefore, it is not obvious that typical regulatory framework of pension funds is conductive to optimal pensions. By establishing a set of default options on investment portfolios, this paper proposes a mechanism to align the incentives of the pension fund management companies with the long-term objectives of the contributors. The paper provides a methodology, which is subsequently applied to Colombia.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5775.

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Date of creation: 01 Aug 2011
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Handle: RePEc:wbk:wbrwps:5775

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Keywords: Debt Markets; Emerging Markets; Financial Literacy; Mutual Funds; Investment and Investment Climate;

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