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Pension funds in Central Europe and Russia : their prospects and potential role in corporate governance


  • Vittas, Dimitri
  • Michelitsch, Roland


Social pension systems in most countries in Eastern Europe and the former Soviet Union face severe financial pressure. Aging populations are increasing that pressure, which stems mainly from in the%design in the %in the flaws and incompatible incentives in the systems. The authors describe the features of the ion systems that have led to the current dire predicament: a big discrepancy between system and demographic dependency ratios, unsustainable targeted replacement rates, the high contribution rates needed, growing evasion, and growing deficits. Radical basic reform is inevitable, they say, but may not be politically feasible or even advisable in the short run. After reviewing experience in other countries, they conclude that restructuring and downsizing the social ion system will leave adequate but affordable (thus sustainable) benefits and will allow for the creation and growth of private pension funds. The shortcomings of company-based defined benefit plans (limited portability, restricted vesting, inadequate funding) suggest that transitional economies should opt in the longer run for non-employer, defined contribution plans based on individual capitalization accounts with full immediate vesting, full portability, and full funding. To cope with the need for a targeted replacement rate, such schemes could operate with variable contribution rates, reset each year in accord with the salary growth of each worker, the cumulative investment return on his/her acount, and the targeted pension benefit. Once private pension funds are established, long-term financial resources should accumulate rapidly. They can then play a major role in modernizing securities markets, stimulating innovation, fostering better accounting and auditing standards, and promoting more disclosure of information. They could also greatly help improve corporate governance and the monitoring of corporate performance. Their"voice"in corporate affairs could be exercised more effectively through collective bodies. They could thus help create more robust structures of corporate governance, lower monitoring costs, and avoid the problems caused by"free riding".

Suggested Citation

  • Vittas, Dimitri & Michelitsch, Roland, 1995. "Pension funds in Central Europe and Russia : their prospects and potential role in corporate governance," Policy Research Working Paper Series 1459, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1459

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    References listed on IDEAS

    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. Prof. Dr. Robert Holzmann, 1994. "Funded and Private Pensions for Eastern European Countries in Transition?," Public Economics 9405004, University Library of Munich, Germany.
    3. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
    4. Bodie, Zvi, 1990. "Pensions as Retirement Income Insurance," Journal of Economic Literature, American Economic Association, vol. 28(1), pages 28-49, March.
    5. Vittas, Dimitri, 1993. "Options for pension reform in Tunisia," Policy Research Working Paper Series 1154, The World Bank.
    6. Barr, Nicholas, 1992. "Economic Theory and the Welfare State: A Survey and Interpretation," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 741-803, June.
    7. Roe, Mark J., 1990. "Political and legal restraints on ownership and control of public companies," Journal of Financial Economics, Elsevier, vol. 27(1), pages 7-41, September.
    8. Vittas, Dimitri, 1992. "Contractual savings and emerging securities markets," Policy Research Working Paper Series 858, The World Bank.
    9. Davis, E.P. & DEC, 1993. "The structure, regulation, and performance of pension funds in nine industrial countries," Policy Research Working Paper Series 1229, The World Bank.
    10. Barr, Nicholas, 1992. "Economic theory and the welfare state : a survey and interpretation," LSE Research Online Documents on Economics 279, London School of Economics and Political Science, LSE Library.
    11. Gray, Cheryl W. & Hanson, Rebecca J., 1993. "Corporate governance in Central and Eastern Europe : lessons from advanced market economies," Policy Research Working Paper Series 1182, The World Bank.
    12. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1992. "The Structure and Performance of the Money Management Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1992 Micr), pages 339-391.
    13. Vittas, Dimitri, 1993. "Swiss Chilanpore : the way forward for pension reform?," Policy Research Working Paper Series 1093, The World Bank.
    14. Vittas, Dimitri & Skully, Michael, 1991. "Overview of contractual savings institutions," Policy Research Working Paper Series 605, The World Bank.
    15. Fox, Louise, 1994. "Old age security in transitional economies," Policy Research Working Paper Series 1257, The World Bank.
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    Cited by:

    1. Vittas, Dimitri, 1996. "Private pension funds in Hungary : early performance and regulatory issues," Policy Research Working Paper Series 1638, The World Bank.
    2. Vittas, Dimitri, 1997. "The Argentine pension reform and its relevance for Eastern Europe," Policy Research Working Paper Series 1819, The World Bank.
    3. Samuel, Cherian, 1996. "Stock market and investment : the governance role of the market," Policy Research Working Paper Series 1578, The World Bank.
    4. Augusto Iglesias-Palau, 2000. "Pension Reform And Corporate Governance: Impact In Chile," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 3(1), pages 109-141.


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