Should Pension Investing be Regulated?

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