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Regulatory controversies of private pension funds

  • Vittas, Dimitri
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    Like other financial institutions, private pension funds require a panoply of prudential and protective regulations to ensure their soundness and safeguard the interests of affiliated workers. These regulations include authorization criteria (such as as minimum capital,"fit and proper,"and business plan requirements), asset segregation and external custody, professional asset management, external audits and actuarial reviews, extensive information disclosure, and effective supervision. These regulations resemble those applied to banks and insurance companies and are not particularly controversial. But private pension funds in developing countries are often subject to structural and operational controls that are more controversial. Such controls include special authorizations and market segmentation,"one account per worker"and"one fund per company"rules, nondiscrimination provisions, regulations on fees and commissions, investment limits, minimum profitability rules, and state guarantees. The author discusses the use of such regulations in developing countries that have implemented systemic pension reforms. He draws a distinction between this approach and the more relaxed regulatory regime that relies on the"prudent person"rule found in more advanced countries. He argues that the"draconian"regulatory approach can be justified on several grounds, but especially by the compulsory nature of the pension system, the absence of strong and transparent capital markets, and the lack of a long tradition of private pension funds. But the regulations should be progressively relaxed as private pension funds and their affiliated workers gain in experience, sophistication, and maturity.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1893.

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    Date of creation: 31 Mar 1998
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    Handle: RePEc:wbk:wbrwps:1893
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    1. Helmut Reisen, 1997. "Liberalising Foreign Investments by Pension Funds: Positive and Normative Aspects," OECD Development Centre Working Papers 120, OECD Publishing.
    2. Vittas, Dimitri, 1996. "Private pension funds in Hungary : early performance and regulatory issues," Policy Research Working Paper Series 1638, The World Bank.
    3. Zvi Bodie, 1989. "Pensions as Retirement Income Insurance," NBER Working Papers 2917, National Bureau of Economic Research, Inc.
    4. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. "Pensions systems and reform : country experiences and research issues," Policy Research Working Paper Series 1470, The World Bank.
    5. Vittas, Dimitri & Iglesias, Augusto, 1992. "The rationale and performance of personal pension plans in Chile," Policy Research Working Paper Series 867, The World Bank.
    6. Rebecca A. Luzadis & Olivia S. Mitchell, 1989. "Explaining Pension Dynamics," NBER Working Papers 3084, National Bureau of Economic Research, Inc.
    7. Salvador Valdés, . "Vendedores de AFP: Producto del Mercado o de Regulaciones Ineficientes?," Documentos de Trabajo 178, Instituto de Economia. Pontificia Universidad Católica de Chile..
    8. Shah, Hemant, 1997. "Toward better regulation of private pension funds," Policy Research Working Paper Series 1791, The World Bank.
    9. James M. Poterba & David A. Wise, 1998. "Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement," NBER Chapters, in: Privatizing Social Security, pages 363-401 National Bureau of Economic Research, Inc.
    10. 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.
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