The Mexican pension annuity market

This paper analyzes the performance and development of the Mexican pension annuity market established as a consequence of the 1997 pension reform. The Mexican experience displays interesting characteristics providing lessons for other countries that still need to design the decumulation phase of their newly established second pillars. At the same, time it raises some technical and policy concerns that need addressing as they could hamper, in the future, the healthy development of the market. The paper concludes that: 1) general life insurance companies may better hedge longevity risk than specialized annuity companies; 2) competition should be based on prices rather than additional products; 3) better disclosure of options under the 1973 and 1997 social security laws should be given to disability and life annuitants; and 4) various measures should be taken to improve asset liability management including allowing companies to trade over the counter derivatives and substituting over time the regulatory asset liability management framework with an economic asset liability management framework.Insurance&Risk Mitigation,Markets and Market Access,Economic Theory&Research,Non Bank Financial Institutions,Pensions&Retirement Systems

Governance of public pension funds : lessons from corporate governance and international evidence

An understanding of corporate governance theory can promote the adoption of appropriate governance tools to limit agency problems in public pension fund management. The absence of a market for corporate control hinders the translation of lessons from the private sector corporate world to public pension governance. The establishment of a fit, and proper governing body for public pension funds, thus may be even more important than the maintenance of a comparable body for private sector corporations. In particular, behavioral controls should be carefully designed.Economic Theory&Research,International Terrorism&Counterterrorism,Decentralization,Payment Systems&Infrastructure,Banks&Banking Reform,Municipal Financial Management,National Governance,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform

Competition and performance in the Hungarian second pillar

The performance of the Hungarian second pillar since inception has been mixed. This is partly due to a less than satisfactory support for the 1997 pension reform, conservative fund portfolio distributions, the hybrid nature of the mandatory pension fund system, the segmented nature of the market in terms of costs, and a less than aggressive commitment on the part of the Hungarian Financial Supervisory Authority to a low-cost, transparent, and competitive equilibrium. In the accumulation phase, the authorities would need to further promote transparency and comparability of information on costs and investment performance, facilitate migration to lower cost funds, and more generally promote competition. The regulatory framework of the payout phase needs to be overhauled before the first cohort of workers retires.Investment and Investment Climate,Economic Theory&Research,Economic Stabilization,Financial Intermediation,Settlement of Investment Disputes

Upgrading the investment policy framework of public pension funds

Public pension funds have the potential to benefit from low operating costs because they enjoy economies of scale and avoid large marketing costs. But this important advantage has in most countries been dissipated by poor investment performance. The latter has been attributed to a weak governance structure, lack of independence from government interference, and a low level of transparency and public accountability. Recent years have witnessed the creation of new public pension funds in several countries, and the modernization of existing ones in others, with special emphasis placed on upgrading their investment policy framework and strengthening their governance structure. This paper focuses on the experience of four new public pension funds that have been created in Norway, Canada, Ireland and New Zealand. The paper discusses the safeguards that have been introduced to ensure their independence and their insulation from political pressures. It also reviews their performance and their evolving investment strategies. All four funds started with the romantic idea of operating as'managers of managers'and focusing on external passive management but their strategies have progressively evolved to embrace internal active management and significant investments in alternative asset classes. The paper draws lessons for other countries that wish to modernize their public pension funds.Debt Markets,,Emerging Markets,Investment and Investment Climate,Non Bank Financial Institutions

A conceptual framework for retirement products : Risk sharing arrangements between providers and retirees

Voluntary annuity markets are, in most countries, smaller than what the theoretical and part of the empirical literature would suggest. There are both demand and supply constraints that hamper the development of annuity markets. In particular, traditional products available in most countries can require excessive minimum capital requirements for given investment opportunities available to providers. Investment and longevity risk should be shared between providers and annuitants so that supply constraints can be relaxed. Alternative annuity products, which imply risk sharing, could be backed by substantially lower capital investments or, equivalently, provided at substantially lower prices to consumers.Insurance&Risk Mitigation,Environmental Economics&Policies,Pensions&Retirement Systems,Economic Theory&Research,Non Bank Financial Institutions,Insurance&Risk Mitigation,Pensions&Retirement Systems,Economic Theory&Research,Environmental Economics&Policies,Non Bank Financial Institutions

Contractual savings or stock market development - Which leads?

The authors study the relationship between the development of contractual savings (assets of pension funds, and life insurance companies) and non-life insurance, and, the development of stock markets (market capitalization and value traded). Their contribution lies in providing time-series evidence on a hypothesis that is very popular - but had not been substantiated - among supporters of fully funded pension systems in which funds invest large shares of their portfolios in tradable securities (equities, bonds). The literature is not clear on its assumption regarding causality between contractual savings, and capital market development. A one-way or two-way relationship is assumed, usually inter-changeably; the authors address the questions of which leads empirically. They present the evidence, including descriptive statistics, and the results of Granger causality tests, for OECD countries, and such countries as Chile, Malaysia, Singapore, South Africa, and Thailand. They do not present a theoretical framework, but do explain how the growth of the contractual savings sector, is thought to promote financial development. The authors find evidence in the data that causality between institutions, and markets either does not exist, or, if it exists, runs predominantly from institutions to markets. To a lesser extent, there is simultaneous causality between institutions, and markets. Furthermore, there is limited evidence that causality runsonly from markets to institutions (the only exception seems to be for non-life insurance in developing countries). Results seem to support the idea that the development of institutional investors, is likely to promote the growth of market capitalization, more than that of value traded. In developing countries, there seems to be no causality from pension funds to growth in value traded, while there is causality from life, and non-life insurance.International Terrorism&Counterterrorism,Economic Theory&Research,Banks&Banking Reform,Payment Systems&Infrastructure,Financial Intermediation,Financial Intermediation,Contractual Savings,Insurance Law,Economic Theory&Research,Banks&Banking Reform

The impact of contractual savings institutions on securities markets

The authors assess empirically the impact of contractual savings institutions portfolios (pension funds and life insurance companies) on securities markets, for example, depth and liquidity in the domestic stock market, and depth in the domestic bond market. They discuss how the institutionalization of savings can modify financial markets through the lengthening of securities'maturities. The results are the following: 1) An increase in assets of contractual savings institutions relative to domestic financial assets has a positive impact on the depth of stock and bond markets on average. 2) The impact on stock market depth and liquidity is nonlinear: it is stronger in countries where corporate information is more transparent. 3) There is evidence of a significant heterogeneity among countries: contractual savings have a stronger impact on securities markets in countries where the financial system is market based, pension fund contributions are mandatory, and international transactions in securities are lower. 4) The authors do not find that the impact of contractual savings institutions on securities markets is explained by the overall level of development, education, demographic structure or the legal environment.Economic Theory&Research,Insurance&Risk Mitigation,Banks&Banking Reform,Payment Systems&Infrastructure,Insurance Law,Insurance&Risk Mitigation,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Insurance Law

Contractual savings, capital markets, and firms'financing choices

The authors analyze the relationship between the development and asset allocation of contractual savings and firms'capital structures. The authors develop a simple model of firms'leverage and debt maturity decisions. They illustrate the mechanisms through which contractual savings development may affect corporate financing patterns. In the empirical section, the authors show that the development and asset allocation of contractual savings have an independent impact on firms'financing choices. Different channels are identified. In market-based economies, an increase in the proportion of shares in the portfolio of contractual savings leads to a decline in firms'leverage. In bank-based economies, instead, an increase in the size of contractual savings is associated with an increase in leverage and debt maturity in the corporate sectorBanks&Banking Reform,Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Environmental Economics&Policies,International Terrorism&Counterterrorism

An assessment of reform options for the public service pension fund in Uganda

This paper analyzes the future liabilities that the Ugandan Public Service Pensions Fund might accumulate under the provisions of the Pensions Act (CAP 286) unless it is reformed. It then discusses alternative reform options that can be used in designing an educated homegrown reform of the fund. The paper supports a hybrid (two-pillar) reform option composed of a small defined benefit scheme and a complementary defined contribution scheme, instead of a pure defined contribution (monopillar) reform option discussed by policymakers in the country. The main reason for this is related to the fact that hybrid and pure defined contribution reforms will have the same impact on reducing pension expenditure (for the same grandfathering rules and surplus in the first pillar). In addition, everything else being equal, the hybrid reform is likely to produce higher average replacement rates due to the redistributive and pooling properties of the small defined benefit pillar.Pensions&Retirement Systems,Enterprise Development&Reform,Population Policies,State Owned Enterprise Reform,Labor Markets

Contractual savings institutions and banks'stability and efficiency

The authors analyze the relationship between the development of contractual savings institutions and banks'efficiency, credit, and liquidity risks. They discuss the potential mechanisms through which the development of contractual savings institutions may affect the banking sector. They show that the development of contractual savings institutions has a significant impact on bank spreads and loan maturity. After controlling for banks'characteristics, macroeconomic factors, and more standard indicators of financial development, they show that the development of contractual savings institutions is associated with increased efficiency of the banking system and greater resilience to credit and liquidity risks.Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Insurance&Risk Mitigation,Contractual Savings,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Insurance&Risk Mitigation