Do Investment Regulations Compromise Pension Fund Performance?: Evidence from Latin America
World Bank Publications, Jan 1, 1999 - Business & Economics - 50 pages
" "Draconian" regulations have created distortions in asset management, limited opportunities for diversification, and, as a consequence have hampered, the performance of pension funds." This volume shows that the return to retirement assets, expected replacement rates, and, hence, the net welfare gain from pension reform is lower under a draconian regulatory framework than under a more liberal pension fund investment regime. Important policy conclusions of the paper are that existing regulatory regimes should be liberalized as soon as possible to allow pension fund investments in a wider array of financial instruments and that regulations should require evaluation of pension fund performance against market benchmarks as opposed to exclusive focus on comparisons with industry averages. The paper also suggests a review of the current structure of the private pension fund industry in Latin America and an evaluation against alternatives in the light of actual performance experience.
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Argentina asset allocation asset management Average return Standard balanced benchmark bank deposits Benchmark relative Bolivia bond index calculated capital markets Chile Colombia contribution rate Corporate bonds defined contribution Deposit rate diversification DRACONIAN REGULATION equity index evaluate expected replacement rates fees fixed-income Foreign assets fund managers funds in Chile government securities herd behavior IFCG income index funds industry average investment limits investment regime Latin American Latin American countries mance mandatory market benchmark market indexes ment Mexico moral hazard mutual funds net-of-fees paper pension fund industry pension fund managers pension fund performance pension fund returns pension funds relative pension reform pension systems percent performance of pension Peru portfolio limits private pension funds profitability rules prudential Public limited companies Public PAYG rate of return real return return of pension return Standard deviation return-matching risk-adjusted performance risk/return second pillar Securitized sion fund Table tion Uruguay volatility worker choice World Bank
Page 14 - Ramirez Tomic (1997) found that herding by Chilean pension funds had actually decreased slightly after the fluctuation band around the minimum rate of return was narrowed.
Page 41 - Las regulaciones a la composici÷n de cartera y las inversiones de los fondos de jubilaciones y pensiones: un ejercicio de simulaci÷n para el caso Argentine', Revista de Analisis Econ÷mico, vol 11, no 1. Clark, R. / Goodfellow, GP / Schieber, SJ / Warwick, D. (1998): 'Making the most of 401(k) plans: who's choosing what and why?
Page 35 - Chile is considering changing the application of the rule to a 36-month rolling basis.
Page 11 - ... moral-hazard problem caused by government pension guarantees • the transition cost to a funded pension system may be prohibitively high for countries with large explicit debt burdens and so can be eased by requiring investment in government bonds As with restrictions on industry structure, asset-allocation limits are a way of isolating pension assets from agency and systemic risks in capital markets. The prudent-person rule may not be viable where capital-market infrastructure is underdeveloped...
Page 26 - There are at least two ways in which this can be done. One is through the National Association of Audubon Societies.
Page 7 - Luxembourg are equivalent to investing all of the fund in the sponsoring employer's equity. 384 limits are set lower for issuers that have financial interests in the pension fund managing companies. There are similar prudential rules elsewhere. In addition to these prudential rules, some countries also impose direct constraints on asset allocation. Countries tend to take two approaches to regulation of asset allocation, which Vittas (1996) describes as 'Draconian
Page 8 - ... of fund, (ii) 15% of company's public capital No specific limits Uruguay Not regulated Equity investment not permitted Not regulated. Uruguay and Mexico have the most restrictive regimes, although, as in Bolivia, they are supposed to be only temporary. In Uruguay, pension funds are subject to both minimum and maximum limits on investment in government securities. The band is expressed as percentage of the portfolio, and there is a phased programme in which the band is to fall from 80-100% in...
Page 8 - Rep˙blica - dominates the market average (56% of total assets in May 1998), other pension funds are also forced to reach the 2% real return. In Colombia, the minimum return is calculated as the arithmetic average of the return of the pension fund industry over three years and the return over three years on a market portfolio17. No ceiling is placed on the returns. The regulator checks compliance with the stipulated minimum return on a three-month basis. Retirement phase In all countries except Uruguay,...
Page 11 - ... per cent of GDP. The implied restrictions of foreign asset shares are calculated to achieve the implied change in foreign assets. Source: Aizenman and Guidotti (1994); own calculations. If the new pension funds are not willing to hold the massive explicit debt build-up connected with pension reform, interest rates would be driven up which, in turn, would worsen government finances and crowd out private investment (Corsetti and Schmidt-Hebbel, 1996).