Fund Members Research Articles

Crisis as Opportunity: Nixon’s Announcement to Close the Gold Window

The authors reexamine the announcement of the August 1971 decision to suspend convertibility of U.S. dollars to gold, or closing of the gold window, which ended the Bretton Woods system and ushered in the neoliberal era. Existing accounts identify critical pressure on the U.S. gold supply after May 1971 international currency disruptions as a tipping point for this policy. In contrast, using new archival evidence, the authors reveal that Nixon strategically framed May 1971 events as an urgent economic “crisis,” deploying “crisis” as a justification for closing the gold window. Nixon seized crisis opportunism to announce a policy decided upon significantly before May 1971, to privilege U.S. interests in the international arena and to assuage his reelection concerns, before potential backlash by the International Monetary Fund members and the U.S. Congress. The authors draw lessons from this historical case for contemporary events and for examining economic crises as objects of inquiry in their own right.

Heterogeneity effects on the management of retirement fund

ABSTRACTThis article studies the importance of plan members’ heterogeneity to the management of defined benefit (DB) pension fund. We propose a new multi-member model of DB pension fund that allows for heterogeneity in plan members’ retirement ages, salary growths and other characteristics. We first solve analytically for optimal management strategy and show that the sponsor’s supplementary contribution and the fund’s allocation in risky assets are determined by the cross-product between the fund’s expected retirement liabilities and some heterogeneity-adjusted discount factors. We then demonstrate that the presence of heterogeneity can have a significant influence on the optimal management strategy and that a management decision made while ignoring heterogeneity will be suboptimal. The knowledge of desirable and undesirable effects of heterogeneity that we uncover in this article also provides implications to the grouping of fund members. Introducing a presence of young member whose salary is positively correlated with the risky asset and avoid stacking members with negative correlations will all help the management.

Measured Investment Inefficiency of the Australian Superannuation System

The public’s positive impression of Australian superannuation comes from the rapid asset growth of the system and selective sampling inherent in focusing on performance of funds and options may over-estimate the performance of the whole system by two percent per annum due to survivorship bias. From 20 years of official data, it is shown that the poor performance of the system on average, at less than one percent over cash returns, has been masked by strong contribution flows and the exclusion of poorly performing funds in selective sampling. By using robust methods of statistical analysis, the poor performance of the system has been largely attributed to Retail funds which are typically inefficient, profit-seeking operations, with excessive choices, high indirect costs, and conflicted governance. Retail fund members pay significant additional costs compared to Industry fund members due to higher investment and operational costs which are measured here for a recent three-year period. Returns were lower (expressed as additional cost) by 1.1 percent per annum due to inferior choices of asset allocation, where the lower returns did not result in commensurate lower volatilities. Related-party service providers extracted revenue through additional indirect costs at 1.3 percent per annum. More complex operational structures of Retail funds cost another 0.3 percent per annum. The combined lowering of returns by 2.7 percent per annum of a Retail fund member compared to an Industry fund member, results in a nest-egg halved over a 45-year working life or a loss of about one million dollars. Better enforcement of the law on fiduciary duty of trustees is needed to improve the investment efficiency and to reduce cost of the system.

Was spricht gegen Zwei-Klassen-Medizin?

Abstract:In Germany, there is a lively debate on a so-called „two-class-medicine“, meaning that privately insured persons get better medical treatment than sickness fund members. As an economist, the author is not in a position to judge whether this is true. However, the co-existence of social and private health insurance (GKV and PKV) constitutes a „two-class-health insurance“, which leads to severe inequities in the distribution of the financial burden of illness. In this article it is shown that there are legal ways to address and eliminate these inequities without abolishing the private health insurance system altogether. The instruments are the inclusion of private health insurance in the risk adjustment scheme of the sickness funds and the transformation of the GKV contributions into flat per-person amounts, independent of earnings, accompanied by a tax-financed compensation for families with below-average income, as in Switzerland and the Netherlands. Interestingly, this second reform proposal has been vigorously opposed by all leftist parties ever since, who fight for the chimaera of a „people's insurance“, which sounds good but cannot be implemented in a legal way and, moreover, would not even eliminate „two-class-medicine“.

Who starts a self-managed superannuation fund and why?

Self-managed superannuation funds (SMSFs) – small retirement savings funds with four or fewer members – now manage almost one-third of retirement savings in Australia, and serve over 1 million members. The number of SMSFs has increased to more than half a million in two decades, yet little is known about the reasons people start the funds and how they operate. We use a survey of more than 500 SMSF members and 500 large superannuation fund members to analyse why SMSF members commence and manage their own fund, compared to similar people who stay with a large fund. We find that control over investments and tax minimisation are the most common reasons for starting a SMSF, while satisfaction with large funds and unwillingness to take on the administrative burden of self-management are the most common reasons for not doing so. SMSF members do not show any greater financial skills than non-members, but they do display overconfidence, a higher risk tolerance and a more trusting attitude to financial professionals. Model results show that the majority of SMSF members start their funds at the suggestion of financial professionals. We also show that those who say they are thinking about starting a SMSF are different in significant ways from the eventual SMSF members, further evidence of the influence of the advice industry.

A Mathematical Model of Pension Fund Operation and Methods of Fund Stability Analysis

We consider the probability of ruin of a pension fund on a finite time interval. The basis is provided by the standard Cramer–Lundberg model, which is modified by specifying enrolment and contribution parameters in the form of random variables. A number of factors may be treated as random variables in the model: the date of member’s death, members’ wages, the number of fund members, financial indicators (discounting and return rates, inflation, wage growth rates). Each of these factors specified as a random variable affects the nondeterministic behavior of the fund’s receipts and payouts. In this article, the random factors include the number of members joining the pension fund in the relevant year and random mortality.

Zakres i cel działania komisji nadzoru finansowego w wypełnianiu funkcji nadzoru korporacyjnego w otwartych funduszach emerytalnych

Relacje, w jakie wchodzą otwarty fundusz emerytalny (OFE) i powszechne towarzystwo emerytalne (PTE), są bardzo złożone i przyjmują postać relacji agencyjnej o charakterze międzyorganizacyjnym. OFE posiada osobowość prawną. Wyposażony został tylko w jeden organ. Organem OFE jest PTE zorganizowane w formie spółki akcyjnej. PTE tworzy, zarządza oraz reprezentuje OFE wobec osób trzecich. Ustawodawca nie wyposażył OFE w organ, który miałby reprezentować interesy członków funduszu. Wobec powyższego, na gruncie ustaw, znaczące uprawnienia nadzorcze nad działalnością funduszy emerytalnych przypisano Komisji Nadzoru Finansowego (KNF). Zakres zadań KNF zdefiniowano bardzo szeroko i podzielono go na zadania typowo nadzorcze, analityczne, edukacyjne, kooperacyjne i informacyjne. Rozważania prowadzone w pracy osadzono w nurcie pozytywnej teorii agencji, skupiając się na mechanizmach ograniczających konflikt agencji. Mechanizmy governance zdefiniowano jako instytucje prawne, których celem jest ochrona interesów członków OFE. Przyjęto, iż w relacji OFE – PTE pryncypałem jest członek otwartego funduszu emerytalnego, a agentem powszechne towarzystwo emerytalne. Celem opracowania jest określenie miejsca i roli Komisji Nadzoru Finansowego w nadzorze korporacyjnym otwartych funduszy emerytalnych.

Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform

liquidity in the face of increased vulnerabilities calls for enhancing the liquidity support provided through the global financial safety net (GFSN). The global economy is experiencing a period of protracted uncertainty, marked by frequent episodes of volatility. Demand for liquidity has intensified, in particular from emerging markets, which are experiencing a build-up of vulnerabilities and the depletion of their fiscal buffers. The enhanced GFSN meets only partially this higher demand for liquidity. The IMFC and G20 have called on the Fund to further strengthen the safety net. The uneven use of the Fund’s toolkit for crisis prevention suggests the need to reconsider its design. Despite a major overhaul of the Fund’s lending instruments available for precautionary financing, only a modest number of countries have used them. In particular, the lack of access to a liquidity backstop for members with strong policies—similar to the standing bilateral swap arrangements (BSAs) among central banks—limits the availability of Fund support over the whole duration of the shock during protracted periods of global uncertainty. Moreover, the need to resort to Fund financing still carries a high political cost (stigma) for some members. To enhance further the Fund’s toolkit for crisis prevention, consideration could be given to revisiting the existing toolkit and introducing new instruments. The toolkit could thus be enhanced by: establishing a new facility for precautionary financing that would provide a "standing" liquidity backstop to members with strong fundamentals and policies for use when hit by liquidity shocks; and adjusting the existing toolkit to maintain cohesion. Any change to the Fund toolkit would need to take into account the tradeoffs between reducing stigma and containing moral hazard, while simultaneously safeguarding Fund resources. A Fund policy monitoring instrument could improve the cohesion of the global safety net. As the GFSN has expanded and become more multi-layered, there is a need to improve cooperation across the different layers to unlock financing and signal commitment to reforms. Creating a policy monitoring instrument that is available to all Fund members could help in this regard. Next steps . In light of Directors’ views on these points, staff could come back with subsequent papers that lay out specific and detailed proposals for reforming the lending toolkit. While these papers focus on the GRA lending toolkit, a separate forthcoming paper will assess some aspects of the concessional lending toolkit.

The International Rare Diseases Research Consortium: Policies and Guidelines to maximize impact

The International Rare Diseases Research Consortium (IRDiRC) has agreed on IRDiRC Policies and Guidelines, following extensive deliberations and discussions in 2012 and 2013, as a first step towards improving coordination of research efforts worldwide. The 25 funding members and 3 patient umbrella organizations (as of early 2013) of IRDiRC, a consortium of research funders that focuses on improving diagnosis and therapy for rare disease patients, agreed in Dublin, Ireland in April 2013 on the Policies and Guidelines that emphasize collaboration in rare disease research, the involvement of patients and their representatives in all relevant aspects of research, as well as the sharing of data and resources. The Policies and Guidelines provide guidance on ontologies, diagnostics, biomarkers, patient registries, biobanks, natural history, therapeutics, models, publication, intellectual property, and communication. Most IRDiRC members—currently nearly 50 strong—have since incorporated its policies in their funding calls and some have chosen to exceed the requirements laid out, for instance in relation to data sharing. The IRDiRC Policies and Guidelines are the first, detailed agreement of major public and private funding organizations worldwide to govern rare disease research, and may serve as a template for other areas of international research collaboration. While it is too early to assess their full impact on research productivity and patient benefit, the IRDiRC Policies and Guidelines have already contributed significantly to improving transparency and collaboration in rare disease research.

Strengthening Post‐Crisis Fiscal Credibility: Fiscal Councils on the Rise – A New Dataset

AbstractInstitutions that aim to constrain policy discretion in order to promote sound fiscal policies are once again at the forefront of the policy debate. Interest in fiscal councils – independent watchdogs active in the public debate – has grown rapidly in recent years. In this paper, we present the first cross‐country dataset summarising key characteristics of fiscal councils among International Monetary Fund members. The data document a surge in the number of fiscal councils since the 2008–09 economic and financial crisis, and also illustrate that well‐designed fiscal councils are associated with stronger fiscal performance and better macro‐economic and budgetary forecasts. Key features of effective fiscal councils include operational independence from politics, the provision or public assessment of budgetary forecasts, a strong presence in the public debate and the monitoring of compliance with fiscal policy rules.

Accountability in Regulatory Reform: Australia's Superannuation Industry Paradox

The Australian Superannuation Industry is generally seen as very strong and successful by global standards. However, three decades of legislative reform in the Australian superannuation industry have created a paradox: ongoing reforms but continuing dissatisfaction with areas of governance and outcomes. These include high levels of administrative and investment fees, and systematic problems around a culture of conflicted investment advice. In seeking to further elaborate and then resolve this paradox, this article draws upon an extensive research project conducted by the authors within the Australian superannuation industry, including three voluntary and anonymous surveys of superannuation trustees/licensees. This research has revealed that fund members are vulnerable to significant and expanding private-interest rents generated by the financial services sector. This may be explained by regulatory capture mechanisms variously described as statutory, agency, corrosive and intellectual capture. The article examines ways to better achieve public interest outcomes, and at a time when public sector integrity remains an area of particular attention, how more can be done to blunt the force of private interest rent seeking.

Do boards of trustees of South African retirement funds owe fiduciary duties to both the funds and fund members? The debate continues

Over the years, the South African retirement fund industry has experienced major regulatory changes. These changes were aimed at imposing a higher standard of governance on the boards of trustees governing various pension funds. As such, there has been a debate within the retirement fund industry as to whom the board, as the governing and managing body of the retirement fund, is accountable. South African courts and tribunals adjudicating pension fund related disputes and the retirement industry at large seem to share the view that the board of trustees is accountable to both the fund and its members. In that the board of trustees owes fiduciary duties to both the fund and its members, meaning that the board is required to act in the best interest of the fund and its members. However, in this paper I demonstrate that the boards of trustees of South African Pension Funds are accountable to and owe fiduciary duties only to the fund they serve and not members of those funds. Furthermore, I submit that at the very best the board owes a duty of good faith towards the members of the fund. In order to substantiate my submissions, I distinguish the legal position relating to trust law from the law relating to retirement funds in South Africa.

Large Natural Disasters--Enhancing the Financial Safety Net for Developing Countries

The Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) are valuable components of the disaster risk financing tool kit for Fund members, especially developing countries. They help to meet urgent balance of payments needs, and are designed to play a catalytic role in mobilizing other external financing. This paper develops proposals for a higher annual access limit under the RCF and RFI, building on a November 2016 staff paper on small states’ resilience to natural disasters and climate change (IMF, 2016c). Directors generally supported the proposal in that paper to establish higher annual access limits of 60 percent of quota under the RCF and RFI for countries experiencing severe natural disaster-related damages. The focus of this paper is to specify the threshold of damage from a natural disaster that would allow members experiencing urgent balance of payments needs arising from such disasters to access emergency financing at the higher annual limit. In the November 2016 paper, staff proposed, among other things, the possibility of establishing a higher access limit under the RCF and RFI where the amount of damage reached the threshold of 30 percent of GDP. Most Directors regarded the proposed threshold of disaster damage as overly restrictive, and suggested lowering the threshold to 20 percent of GDP or lower, provided that this did not jeopardize the self-sustainability of the PRGT. For a range of future disaster outcomes, a damage threshold of 20 percent of GDP could increase projected annual average PRGT loan demand in the 1-5 percent range over the next decade, which should not pose significant risks to the robustness of PRGT self-sustainability. Cautious stewardship of PRGT resources argues against a lower disaster damage threshold, pending further experience with disaster trends and associated PRGT loan demand. This paper does not propose changes to the current cumulative access limits for the RCF and RFI. The cumulative access limits play an important role in the Fund’s financing architecture, constraining the extent to which countries can access Fund resources without implementing a Fund-supported program with upper credit tranche (UCT) conditionality and associated policies in circumstances where such a program would be more appropriate. The Board will have the opportunity to review the cumulative access limits in the context

Measuring Normative Risk Preferences

The results of eliciting risk preferences depend on the elicitation method. Different methods of measuring the same variable tend to produce different results. This raises the question whether normative risk preferences can be elicited at all. Using two types of manipulation, I assess the normative value of risk preference elicitation methods. Following IRT, the results of the multiple lottery choice method are combined with two qualitative methods into a composite score. The responses of 9,235 pension fund members to a dedicated survey indicate this composite score approximates the latent variable normative risk preferences better than individual method responses do, substantially reducing measurement noise and method-specific biases. Analysis of the manipulations shows that both the results and the normative value of the risk preference elicitation methods depend on the specific amounts, order, and endowment chosen. Combining simpler methods with more advanced methods framed closely to the relevant situation increases the normative value of elicited risk preferences.

The Role of the Fund in Governance Issues - Review of the Guidance Note - Preliminary Considerations - Background Notes

The Background Notes in this Supplement provide essential context and analysis needed to understand the problem of governance and corruption, its impact on the economies of Fund members, and the history and nature of Fund engagement on these issues. They also seek to support the assessment of the Fund’s overall approach to promoting good governance and reducing corruption—including through the lenses of key stakeholders—with a view to identifying strength and closing any remaining gaps.

New trajectories of unionization in the Nordic Ghent countries: Changing labour market and welfare institutions

Unemployment insurance funds (the ‘Ghent system’), subsidized by the state and controlled by the labour movement, have contributed to high trade union densities in the Nordic countries. However, dependence on these funds as a recruiting mechanism makes trade union membership sensitive to institutional changes to unemployment insurance benefits and the institutional set-up surrounding and regulating them. In this article, we investigate recent institutional changes in the three Nordic countries following the Ghent model, Finland, Sweden and Denmark, and analyse the consequences for union and fund membership. These countries have witnessed different combinations of two types of reform, less attractive unemployment benefits plus new institutional alternatives to the traditional union-run funds, and this has led to different outcomes in each country. Benefit retrenchment and increased contributions led to a sharp decline in fund membership in Sweden, whereas this trend is less pronounced in Finland and Denmark. Instead, the main trend here has been a shift from union-led to alternative forms of fund membership, but in different ways.

The Trimmed Bootstrap: An Empirical Simulation Technique for Pension Finance Researchers

Different variations of the Efron [1979] bootstrap have become popular tools for simulating retirement outcomes. However, to date, no study has examined their accuracy when they are used to simulate retirement outcomes. We test the accuracy of the competing bootstrap methods through a series of out-of-sample tests. The analysis shows that these bootstraps can be wildly inaccurate. Our concerns with existing methods lead us to propose a new bootstrap: the “trimmed” bootstrap. Its significantly greater accuracy will benefit policymakers, advisers, and fund members.

The impact of behavioural economics and finance on retirement provision

The significant shift from defined benefit to defined contribution retirement funds in South Africa has led to many fund members bearing responsibility for a range of risks. Many of these risks, such as those related to investment, longevity and cognitive deterioration are unavoidable. Another category of risk is that related to the choices made by government, employers, trustees, advisors and/or individuals at either national, scheme or individual level. These choices may also pose a threat to a member's financial wellbeing in retirement. Behavioural economics and finance helps to explain the choices made by these stakeholders in the retirement industry. The authors explain this concept in the context of industry stakeholders and the unique South African economic and demographic landscape, focusing on defined contribution retirement funds. Key behavioural insights applicable to the retirement industry are explored and, where practical, illustrated by stakeholder behaviour. Possible ways to harness these insights in order to improve retirement wellbeing are then discussed.

Accumulating approach to the life-cycle pension model: practical advantages

In the present study, we make an effort to enhance the practical advantages of the life-cycle pension model. We observe that previous studies are based on a “switching†approach, that is, on the assumption that when a pension fund member reaches a certain age, his accumulated savings are fully switched to another fund with a lower risk profile; we suggest an “accumulating†approach, according to which, at the same age, the member’s previously accumulated wealth continues to be invested in the same fund, while his new regular pension contributions start being directed to another (less risky) fund. We consider a hypothetical (average) Israeli employee, analyze two age-dependent life-cycle investment distributions of his pension savings, and perform a comparison between the two approaches to the life-cycle model by employing an estimation-based and a simulation-based technique. The results demonstrate that the “accumulating†approach provides: (i) higher estimated annualized real returns and real accumulated savings; (ii) significantly higher simulated mean and median values of real accumulated savings. Moreover, we document that, though the “accumulating†approach increases the standard deviation of total savings, it does not lead to critically low pension wealth levels even for relatively unfavorable sequences of financial assets’ returns. Therefore, we conclude that the “accumulating†approach to the life-cycle model has a potential significantly to increase pension fund members’ total accumulated wealth relatively to the common “switching†approach, without significantly increasing the members’ risk.

Who Starts a Self-Managed Superannuation Fund and Why?

Self-managed superannuation funds (SMSFs) – small retirement savings funds with four or fewer members – now manage almost one third of retirement savings in Australia, and serve over one million members. The number of SMSFs has increased to more than half a million in two decades. Yet little is known about the reasons people start the funds and how they are operated. We combine survey responses of more than 500 SMSF members and 500 large superannuation fund members to understand the motivation of SMSF members and how they compare with similar people who stay with a large fund. Control over investments and tax minimisation are the most common reasons for starting a fund. Satisfaction with large funds and unwillingness to take on the administrative burden of self-management are the most common reasons for not doing so. SMSF members do not show more financial skill than non-members, but they do express a higher risk tolerance and a more trusting attitude to financial professionals. We present evidence that the majority of SMSF members start their funds at the suggestion of financial professionals. We also show that the types of people who say they are thinking about starting a SMSF are different in significant ways from the types of people who end up as SMSF members, further evidence for the influence of the advice industry.