Policies to Promote Saving for Retirement : A Synthetic Overview
The author argues that public and private pillars are essential for a well-functioning pension system. Public pillars, funded or unfounded, offer basic benefits that are independent of the performance of financial markets. Since financial markets s...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/03/1733735/policies-promote-saving-retirement-synthetic-overview http://hdl.handle.net/10986/14840 |
| Summary: | The author argues that public and
private pillars are essential for a well-functioning pension
system. Public pillars, funded or unfounded, offer basic
benefits that are independent of the performance of
financial markets. Since financial markets suffer from
prolonged, persistent, and large deviations from long-term
trends, they cannot be relied on as the sole provider of
pension benefits. Funded pillars provide benefits that are
based on long-term capital accumulation and financial market
performance. But they need to be privately managed to
minimize dependence on public sector institutions and avoid
government dominance of the economy and financial markets.
The author focuses mainly on the promotion, structure, and
regulation of funded pillars. He discusses the case for
using compulsion and tax incentives, for exempting some
categories of workers such as the very young (under 25), the
very old (over the normal retirement age), the very poor
(those earning less than 40 percent of the average wage),
and the self-employed, and for offering a credit transfer to
be added to individual capitalization accounts to encourage
participation by lower-income groups. A robust regulatory
framework with a panoply of prudential and protective rules
covering "fit and proper" tests, asset
diversification and market valuation rules, legal
segregation of assets and safe external custody, independent
financial audits and actuarial reviews, and adequate
disclosure and transparency would be essential. An
effective, proactive, well-funded, and properly staffed
supervision agency would be necessary. Tight investment
rules could initially be justified for countries with weak
capital markets and limited tradition of private pension
provision. But in the long run, adoption of the
"prudent expert" approach with publication of
"statements of investment policy objectives"
(SIPOs) would be preferable and more efficient. Various
guarantees covering aspects such as minimum pension levels
and relative investment returns need to be provided to
protect workers from aberrant asset managers and insolvency
of annuity providers, but care must be taken to address
effectively the risk of moral hazard. The author also argues
for greater individual choice, including the creation of a
dual regulatory structure. One part would involve heavy
regulation with constrained choice of investment funds,
limits on operating fees and on account switching, and
strong government safeguards and guarantees. This would
cater to those workers with low risk tolerance. The other
part would be more liberal but based on strong conduct
rules. It would offer greater choice of investment funds,
allowing multiple accounts and liberal account switching,
impose no limits on operating fees, and providing no or
fewer state guarantees. This would cater to workers seeking
a higher return and who are willing to tolerate a higher
level of risk. |
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