Abstract
Pension funds in some economies are used as a captive audience to channel capital at belowmarket rates to government. This policy is only one tool in the financial repression toolkit, butit is receiving increased attention as governments around the world struggle to increase fiscalspace and reduce their sovereign debt burden as they rebuild their economies after the pandemic.First, this paper provides an analysis of financial repression using pension funds from a historicalperspective. It then assesses the welfare and distributional implications of this policy and distillslessons learned from a variety of advanced and emerging economies. The wide range of possibleinterventions and idiosyncratic country conditions make a general set of policy recommendationselusive, but the paper suggests four high-level principles that can help policymakers assess thecosts and benefits of implementing policies that employ pension funds as a captive audience forfinancial repression.
Highlights
Financial repression occurs when governments channel funds to themselves at below market rates by various means – including from institutional investors such as pension funds
One form of financial repression is accessing funds from “captive audiences:” pension funds, banks and insurance companies which are compelled in some fashion to channel funds towards government at low interest rates
Canada’s public pension funds provide a good example of institutions which have transitioned from having little independent governance and a lack of investment diversification to being global governance leaders. Their foundation built on stakeholder trust, design and management principles and results focused execution can be a lesson for pension funds and policy makers in other countries
Summary
Financial repression occurs when governments channel funds to themselves at below market rates by various means – including from institutional investors such as pension funds. Whilst other methods of repression (such as capital controls) are no longer as widely practiced and accessing funds from the banking sector entails adverse short-term consequences, using longer-term capital such as pension funds has become more of an option They have grown in size as populations worldwide have aged and their assets have grown. Lessons from countries where pension fund assets have been successfully channeled towards long-term development suggest that funds should be subject to clear transparency and accountability rules In these cases, capital extracted through financial repression is often managed professionally, at arms-length. Canada’s public pension funds provide a good example of institutions which have transitioned from having little independent governance and a lack of investment diversification to being global governance leaders Their foundation built on stakeholder trust, design and management principles and results focused execution can be a lesson for pension funds and policy makers in other countries.
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