Should Pension Investing be Regulated?

10 Pages Posted: 23 May 2009

See all articles by E. Philip Davis

E. Philip Davis

National Institute of Economic and Social Research (NIESR); Brunel University

Yuwei Hu

Banco Bilbao Vizcaya - Banco Bilbao Vizcaya Argentaria, S.A.

Date Written: May 20, 2009

Abstract

Government has a natural concern about the investment performance and associated risks of pension funds. If these funds are poorly managed and unable to pay pensions to retirees, government may have to step in. In addition to solvency regulation, this risk can be controlled by establishing investment regulations that impact portfolio composition. There are two basic regulatory approaches. One approach is to impose quantitative asset restrictions (QAR, involves direct limits on holdings of specific assets). The other is to establish prudent person rules (PPR, requires following prudent investment policies and practices). This article assesses the pros and cons of both approaches, considering finance theory and empirical evidence. Both theory and empirical evidence suggest the PPR approach is likely more efficient.

Keywords: Pension Fund, Pension Fund Regulator, Prudent Person Rule, Quantitative Asset Restriction, Rotman

Suggested Citation

Davis, E. Philip and Hu, Yuwei, Should Pension Investing be Regulated? (May 20, 2009). Rotman International Journal of Pension Management, Vol. 2, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=1408689

E. Philip Davis

National Institute of Economic and Social Research (NIESR)

2 Dean Trench Street
Smith Square
London, SW1P 3HE
United Kingdom

Brunel University ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Yuwei Hu (Contact Author)

Banco Bilbao Vizcaya - Banco Bilbao Vizcaya Argentaria, S.A. ( email )

Paseo de la Castellana, 81
MADRID, MAD 2804
Spain
+34-915-377000 (Phone)
+34-915-376766 (Fax)

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