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Toward better regulation of private pension funds

Author

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  • Shah, Hemant

Abstract

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.

Suggested Citation

  • Shah, Hemant, 1997. "Toward better regulation of private pension funds," Policy Research Working Paper Series 1791, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1791
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    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Whitehouse, Edward, 2000. "Administrative charges for funded pensions: An international comparison and assessment," MPRA Paper 14172, University Library of Munich, Germany.
    2. Aiyer, Sri-Ram, 1997. "Pension reform in Latin America : quick fixes or sustainable reform?," Policy Research Working Paper Series 1865, The World Bank.
    3. 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.
    4. Eduardo Siandra, 1999. "La inversión extranjera de los fondos de pensiones y el desarrollo del mercado de capitales doméstico," Documentos de Trabajo (working papers) 0599, Department of Economics - dECON.
    5. Pecchenino, R.A. & Pollard, P.S., 1999. "Government Mandated Private Pensions: A Dependable Foundation for Retirement Security?," Papers 9902, Michigan State - Econometrics and Economic Theory.
    6. World Bank, 2000. "Nicaragua : Pension Reform Proposal," World Bank Other Operational Studies 14972, The World Bank.
    7. 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 wp196, University of Michigan, Michigan Retirement Research Center.
    8. Vittas, Dimitri, 2002. "Policies to promote saving for retirement : a synthetic overview," Policy Research Working Paper Series 2801, The World Bank.
    9. repec:dau:papers:123456789/6253 is not listed on IDEAS
    10. Luis Chávez-Bedoya & Nelson Ramírez-Rondán, 2014. "Comparando Comisiones por Flujo y Saldo en Fondos de Pensiones con Cuentas Individuales de Capitalización," Working Papers 2014-9, Peruvian Economic Association.
    11. 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.
    12. 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, vol. 24(52), pages 162-221, December.
    13. World Bank, 2005. "Household Risk Management and Social Protection in Chile," World Bank Publications, The World Bank, number 14839.
    14. Ghilarducci, Teresa & Liebana, Patricia Ledesma, 2000. "Unions' Role in Argentine and Chilean Pension Reform," World Development, Elsevier, vol. 28(4), pages 753-762, April.
    15. Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
    16. Eduardo Siandra, 1998. "Sistemas de pensiones, sus reformas y los mercados de capitales," Documentos de Trabajo (working papers) 0299, Department of Economics - dECON.

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