Private Pension Funds Research Articles

Governing Finance: Global Imperatives and the Challenge of Reconciling Community Representation with Expertise

Although the regulation of financial institutions and global markets has been subject to extensive research and policy practice, regulation often comes second to governance: regulation cleans up failures of governance in the management and performance of private financial institutions and markets. There are two theories of the nature and practice of governance; one emphasizes its functional performance, whereas the other emphasizes its political foundations. In this article, I suggest that best practice seeks to reconcile functionalism with community representation and that representation is a virtue in its own right and need not be seen as antithetical to functional efficiency. To sustain these arguments, I note the distinctive characteristics of financial decision making under risk and uncertainty, using simple examples to underscore the benefits of good governance. I then present criteria for well-governed financial institutions, specifically public and private pension funds, with implications for best practice as illustrated by four case studies of funds from Canada, Europe, and the United States. The final section considers the lessons of these case studies for the design of sovereign wealth funds and raises questions as to whether there are limits to reconciliation, given the acceleration of global financial integration.

Retirement Forced Saving in Peru using Hyperbolic Discounting Functions: A Doctoral Research Proposal

Empirical and survey data related to voluntary pensions in the United States indicated that households have not been saving enough to cover later consumption requirements. This evidence has been analyzed using a conceptual framework named the hyperbolic consumption model that integrates a classical utility theory with behavioral concepts in order to explain some anomalies in consumption-saving decisions. The proposed study will analyze the Peruvian situation applying the life-cycle framework, and using the discounted utility model with the exponential and the hyperbolic discounting models. This model requires quantitative information of longitudinal and cross-sectional data. The population included in this study will cover employed individuals who contribute to the Peruvian Private Pension Fund System and self-employed individuals, who are not forced to contribute to this pension system, yet are affiliated to this system. This situation offers a singular opportunity to compare the saving behaviors of both groups. The importance of the self-employed group has been reported in the literature; and their lack of contributions and saving requires an analysis of their behavior. The academic research into the saving behavior of both employed and self-employed will be an important contribution to the understanding of consumption-saving decisions.

The Impact of Private Participation on Disability Costs: Evidence from Chile

Social security systems in many countries face problems of high and escalating disability costs. This paper analyzes how disability costs have been controlled in Chile. The disability insurance system in Chile is much less well-known than the pension part, but it is equally innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely pre-funded, sufficient to cover a lifetime disability annuity and 2) the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in controlling costs. We hypothesize that these procedures and incentives will keep system costs low, by cutting the incidence of successful disability claims. Using the Cox proportional hazard model based on a retrospective sample of new and old system affiliates (ESP 2002), we conclude that observed behavior is broadly consistent with this hypothesis. Disability hazard rates are only 20-35% as high in the new system as in the old, after controlling for other co-variates. Furthermore, analysis of mortality rates among disabled pensioners (using probit and proportional hazard models) suggests that the new system has accurately targeted those with more severe medical problems.

Going to War With the Army You Have

According to Arrighi and Silver, the United States faces a crisis of declining hegemony historically characterized by stagnating wages, hypertrophy of the financial sector, and the shifting of production overseas. Previous cycles suggest that the fate of workers within the hegemonic core depends in part on their political and organizational response. For a generation, organized labor in the United States has sought ways to exercise influence over private and public pension funds. As a result, union staffers have become sophisticated shareholder activists. Recent financial scandals have created a new opening for these activists, who have responded by forming coalitions to reform executive pay. The recent dismissal of a California Personnel Employees Retirement System official implies limits to this investor “pluralism,” but the situation is hardly settled. Another economic downturn might move the interests of investors and workers closer together, and shareholder activists could play a role settling the resulting conflicts over the distribution of income.

Em busca de incentivos para atrair o trabalhador autônomo para a Previdência Social

Este artigo objetiva demonstrar que incentivos são capazes de influenciar a decisão do trabalhador autônomo de participar ou não do sistema público de Previdência (INSS) utilizando um arcabouço de Teoria de Contratos (modelo de Principal e Agente). A flexibilização das regras referentes à cessão de benefícios previdenciários para os mais pobres presentes na Constituição Federal de 1988 funciona como um laboratório sobre a reação da contribuição previdenciária a incentivos. A análise empírica, entretanto, contradiz as previsões do modelo teórico. Há um movimento generalizado de saída do sistema público de Previdência, mas esse movimento é mais acentuado exatamente no grupo dos autônomos mais ricos. Em termos teóricos, isso é explicado como uma violação das restrições de compatibilidade de incentivos. Em termos práticos, pode-se pensar esse movimento a partir da maior oferta de fundos de pensão privados existente no mercado, concorrendo com o INSS.

When Past Reforms Open New Opportunities: Comparing Old‐age Insurance Reforms in Bismarckian Welfare Systems

Abstract France, Italy, Germany, Austria and Spain have all gone through several waves of pension reforms both in the 1990s and in the early 2000s. Comparing the politics of these reforms shows some similar trends: reforms were usually postponed until European integration and/or economic recession forced governments to act. Before the first wave of reforms, the main form of ‘action’ had been to increase payroll taxes to finance pensions. In the 1990s, reforms were usually negotiated on the basis of a quid pro quo: benefits were intended progressively to decrease in exchange for non‐contributory pensions being financed from general tax revenues instead of through the insurance schemes. The second wave of reforms (during the 2000s) seems to have brought more innovation, with new goals such as the development of voluntary private pension funds and the need to increase employment rates among the elderly and to stop early retirement. The article aims, first, to trace the political processes leading to these reforms; second, to reveal the commonalities in these processes between the various cases; and third, to highlight the differences between the first and second waves of pension reform. It will emphasize the role of ‘sequencing’ and demonstrate how each pension reform facilitates the adoption of the next one.

Asset Allocation Challenges for Pension Funds

Pension funds have become the largest class of investors in many markets and, given their size, the allocation of their assets has important implications for the relative prices of financial assets. There may be a trend shift of private (defined benefit) pension fund asset allocation strategies away from equity to bonds, especially to government bonds, given their limited credit risk. The potential demand for such bonds could, in principle, be very substantial, sufficient in fact to result in a scarcity of such bonds in circulation. Many debt managers have taken advantage of current bond market conditions and issued long-term to ultra-long-term bonds. But whether they should follow a strategy of maturity-lengthening with the express aim to facilitate the task for pension fund managers is a different matter. Most policy makers would not recommend that governments undertake to issue long-term debt with the express intent of meeting this demand, not least because they expect the price mechanism to clear apparent imbalances in asset markets.

Pension Reform, Ownership Structure, and Corporate Governance: Evidence from a Natural Experiment

Sweden offers a unique natural experiment to analyze the microeconomic effects of institutionalized saving on ownership structure, corporate governance and performance of listed companies. First, the Swedish pension reform increased the participation of pension funds in the domestic stock market and caused a significant reshuffling in the ownership of the existing pension funds. Second, the availability of detailed data on firm ownership allows us to document the effects of the pension reform. We show that the effects of institutional investment on firm performance depend on the industry structure of pension funds. In particular, we find that firm valuation improves if large independent private pension funds and public pension funds increase their equity stakes in the firm, but not if smaller pension funds and pension funds related to financial institutions and industrial groups increase their shareholdings. Additionally, controlling shareholders appear reluctant to relinquish control and the control premium increases if public pension funds acquire shares.

A atividade de teleatendimento: uma análise das fontes de prazer e sofrimento no trabalho

O presente artigo dedica-se ao estudo da subjetividade dos trabalhadores no serviço de teleatendimento, indagando como as condições e a organização do trabalho, o conteúdo da tarefa e da atividade e os relacionamentos interpessoais contribuem para as vivências de prazer e sofrimento. Escolheu-se para o estudo empírico uma central de atendimento de um fundo de pensão privado. Para apreender o trabalho e compreender seus determinantes, buscou-se suporte teórico-metodológico na Ergonomia e na Psicodinâmica do Trabalho. Foram encontrados 26 indicadores de possíveis fontes de prazer ou sofrimento. A associação do indicador ao sentimento varia de sujeito para sujeito, em cada situação de trabalho. Os indicadores foram agrupados em 4 categorias, conforme as questões de estudo. A configuração da situação de trabalho como prazerosa ou não está vinculada à forma como os sujeitos se relacionam com a mesma. Assim, é fundamental a compreensão das categorias relacionadas ao estudo do prazer e do sofrimento como não estanques, pois elas se inter-relacionam, criando um cenário multideterminado.

How to Integrate Disability Benefits into an Individual Account System: The Chilean Model

Chile offers an innovative approach to disability insurance within a multi-pillar social security system. The individual's retirement savings account is used as part of his disability insurance, but if he becomes disabled the account is topped up enough to finance a defined benefit annuity that pays 70% of the reference wage. This is accomplished primarily through the private insurance market, but with government providing regulations and back-up guarantees. The private pension funds and insurance companies that participate in the assessment process have a pecuniary interest in keeping costs low, unlike most public systems that are run by agencies without a personal incentive to contain costs. The individual accounts, used for old age retirement savings, help to finance the disability and survivors' insurance as a joint product. This further keeps costs down and makes the system less sensitive to demographic shocks than a public pay-as-you-go system would be. However, pre-funding a defined benefit makes system costs much more sensitive to interest rate shifts. The defined benefit reduces risk to the worker but non-differentiated pricing creates cross-subsidies and, in a competitive market, incentives for creaming. Some of the cost reductions to the private insurance may imply a larger future public obligation, due to the minimum pension guarantee. This study examines the potential successes and pitfalls of this mixed public-private funded system of disability insurance and evaluates whether it provides a useful model for the US and other countries.

The Diffusion of Innovations: How Cognitive Heuristics Shaped Bolivia's Pension Reform

In the age of globalization countries pay considerable attention to policy innovations developed in other, especially neighboring, countries. New models that boldly trans form established policy approaches often serve as especially powerful sources of inspiration. For instance, the system of social protection pioneered by Bismarck in Germany prompted other European countries to introduce similar schemes; in subse quent decades this innovation spread beyond Europe as well. More recently, Ronald Reagan's tax simplification of 1986 spurred similar changes in a number of nations. And the Chilean model of pension privatization has had a particularly strong conta gious effect in Latin America and later in eastern Europe.1 What drives this diffusion of innovations? Why does a variety of nations adopt the same new model? This question is especially puzzling when poor, underdeveloped countries emulate a reform designed in a much more advanced nation, which presum ably faces different needs, opportunities, and constraints. For instance, why do poor African countries that lack a domestic science community create state institutions charged with coordinating such a community?2 Why do nations that confront stark social inequality enact a Reaganite tax reform that lowers income tax rates and thus risks diminishing the revenue inflow from the few better-off people who are obligated to pay income tax? And why do poor countries privatize their social security systems although they have a limited formal sector work force that can contribute to private pension funds and an underdeveloped capital market that can administer such invest ments? The adoption of foreign models in countries where these innovations do not seem to fit well is noteworthy. Why do dissimilar nations enact similar policies? Several arguments have been proposed to explain this spread of commonality amid diversity. One approach claims that central coordination and vertical imposi tion were crucial. Accordingly, pressures from powerful international actors?espe cially the World Bank, International Monetary Fund (IMF), and other international financial institutions?pushed a broad cross-section of countries to follow their uni form blueprints. Strongly committed to neoliberalism, international financial institu tions use powerful carrots and sticks to force the same mold on a multitude of nations. To preserve the purity of their policy principles, they preclude adaptations to the specific needs of the importing country.

Private Pension Funds in Hungary

The new pension system launched in Hungary in 1998 is epoch-making for having introduced a mandatory private pension scheme (MPPS). However, the political decision-making on pension reform and the scheme operations have been greatly influenced by conflicts of interests among ministries, political conflicts between parties, and the presence of special interest groups, including trade unions and financial institutions. This situation may have had a certain negative influence on the legal framework of the MPPS and on the management performance of private pension funds. In order for the MPPS to be sustainable in the future and to make insurance beneficiary profits a top priority, the corporate governance reform of pension funds and reinforcement of the monitoring system over them, and political neutralisation of the public pension system are necessary.

An Analysis of Brazilian Urban Population Income According to Different Sources with Emphasis on Pensions During 1992-2002 (Uma Analise a Composicao da Renda da Populacao Urbana Segundo Diferentes Fontes com Enfase na Renda Previdenciaria no Periodo 1992-2002)

The social security policies can be described as a set of actions that aim to cover the eventual loss of the working capacity. In general, the public systems intend to cover a basic portion of the income, without the intention of keeping the total purchasing power. It is usually left to the complementary funds to fulfill this function. In Brazil, the history of the complementary funds is relatively recent: the law that regulated these funds for the first time (Law 6.435) was approved in 1977. In the past, individuals with higher income used alternative strategies for the maintenance of their purchasing power. Familiar investments in property and businesses were the most common options, since the stock market was very incipient. More recently it is already possible to notice the weight of the private pension funds (open and closed) in the income of the aged Brazilians. This work has as objective the analysis of the urban population disaggregated by sex, groups of age and schooling of the head of the domicile, in the period 1992-2002 according to the different sources of income. Another objective is to calculate the relative weight of each one of these income sources in the individual budget, as well as its evolution in the last decade and along the life cycle. Special emphasis is placed on the income received from social security: when the most aged population is focused, the analysis of the different strategies used (or not) by the individuals to equalize the income along the life cycle points to the fact that between the alternatives, the most efficient ones seem to be the accumulation with the work and or the existence of a complementary fund. The used data are from different PNADs along the time period 1992-2002.

Brazil: The Lula Government and Financial Globalization

The electoral victory of Luis Inacio Lula da Silva in the presidential elections of 2002 epitomized two decades of social and political transformations in Brazil. Nevertheless, instead of launching an alternative mode of doing politics, the program of the Workers' Party affirmed a state logic with a view to gradually updating the economic structure of Brazilian capitalism by means of successive transitions directed by the state, avoiding the active intervention of the subaltern classes in this process. In this logic are inscribed fiscal discipline, social security reform, and giving value to private pension funds. Such funds established a bridge that makes viable the organic alliance of a union bureaucracy, now the manager of these funds, and globalized financial capital.

Why should the portfolios of mandatory, private pension funds be captive? (The foreign investment question)

A model of portfolio optimization, which takes account of the difference between the private and social cost of foreign investment, is used to analyze the relationship between capital shortages and the international diversification of mandatory, private pension funds in developing and transition countries. The socially optimal rate of foreign portfolio investment may be positive, even when access to international capital markets is limited. I propose replacing investment limits with a tax on foreign investments, equal to the difference between their social and private cost. The use of international pension swap is seen to be formally equivalent to the imposition of such a tax.

Pension Reform and Saving

We estimate the impact of increased pension funding on national saving, both in public budgets and in the private sector. First, the experience of U.S. state governments in managing their employee pension funds suggests that their pension accounts are managed apart from the non-pension operating budget and that it is possible to fund a pension system within the public sector. On the other hand, an examination of the experience of national-level governments indicates that a large proportion (60-100 percent) of the fund accumulation in national social insurance systems is offset within the government sector by larger deficits in other budgetary accounts. We argue that the contrasting results for U.S. states and OECD nation states can be traced to differences in the governance of the pension systems and the degree of effort that is made to separate the pension funding from other budget activities. We also examine the cross-national evidence on saving responses within the private sector to fluctuations in private insurance and pension fund accumulation. We find substantial evidence that pension saving substitutes for other forms of private saving.

Private Pension Funds' Problems

Private pension funds in Russia have been growing in number dramatically over the past few years. The increasing importance of private pension funds as holders of financial assets means that their impact on the functioning of financial markets is steadily growing. The article discusses the range of factors that can stimulate further development of the pension system reform — principles of private professional pensions' regulation as well as the structure and mechanisms of pension funds' management.

The occupational pillar of the South African pension system

In a study on pension reform, the World Bank recommended a multi‐pillar pension system to provide for pension needs. The South African pension system rests on three pillars: an occupational pillar, a voluntary saving pillar, and a redistributional pillar. The main focus of this article is on the first pillar. South Africa has a well‐developed occupational pension system, but several problem areas remain, such as limited coverage, lack of competition between funds, and the taxation of funds. To improve the occupational pension pillar it is recommended that licences should be made available to private pension fund administrators (PPFAs) to launch new open pension funds, as was done in Chile. Such PPFAs could extend coverage, promote competition between funds, and also cater for the specific needs of lower‐income individuals. If PPFAs do not perform satisfactorily, their licences may be withdrawn and made available to new bidders.

The impact of wealth on consumption and retirement behaviour in the UK

Housing and pension wealth are shown to be important determinants of personal sector consumption and retirement behaviour in the UK. Housing and state pension wealth have a positive effect on consumption, while private pension wealth promotes greater savings. Greater private defined benefit pension wealth encourages earlier retirement, while greater defined contribution pension wealth has the effect of delaying retirement. State pension wealth appears to have no effect on the retirement decision. Other variables relating to income, labour market and demographic status and spillovers from other sectors are also shown to be important. The consumption equation forecasts the late 1980s boom and the early 1990s slump in the UK better than other models that disregard housing and pension wealth. A particularly important cause of the boom was the huge private pension fund surpluses that accrued as a result of the stock market boom of the 1980s.

The New Pension System and Private Pension Funds in Hungary

After the long and the intensive political debates, the Hungarian government launched so-called 'the three-pillar pension system' in 1998. One of the key elements of the 1998 reform was to create the Mandatory Private Pension Funds (MPFs) as the second pillar of the new system. The aim of this paper is to examine the institutional framework and performance of MPFs, taking into consideration the fact that the decision making process before 1998 and the following political maneuvers had a great impact on management activities and economic efficiencies of the pension funds. As a conclusion of the paper, we maintain that in order to mitigate negative influence from political strife and maximize the interests of the fund members, certain governance reforms and reinforcement of the monitoring system against MPFs should be enacted for successful transformation of the Hungarian pension system.