Improving the Investment Performance of Public Pension Funds: Lessons for the Social Insurance Fund of Cyprus from the Experience of Four OECD Countries

Cyprus Economic Policy Review, Vol. 2, No. 2, pp. 3-35

33 Pages Posted: 5 Aug 2009

See all articles by Gregorio Impavido

Gregorio Impavido

International Monetary Fund (IMF); World Bank

Ronan O'Connor

affiliation not provided to SSRN

Dimitri Vittas

World Bank - Financial Sector Development

Date Written: June 30, 2008

Abstract

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. In this context, it discusses the management of the reserves accumulated by the Social Insurance Fund of Cyprus and considers options for raising the investment return on the reserves.

Keywords: Social security, public pension funds, notional reserves, asset management, fund governance

JEL Classification: G23

Suggested Citation

Impavido, Gregorio and O'Connor, Ronan and Vittas, Dimitri, Improving the Investment Performance of Public Pension Funds: Lessons for the Social Insurance Fund of Cyprus from the Experience of Four OECD Countries (June 30, 2008). Cyprus Economic Policy Review, Vol. 2, No. 2, pp. 3-35. Available at SSRN: https://ssrn.com/abstract=1444553

Gregorio Impavido

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.imf.org

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Ronan O'Connor

affiliation not provided to SSRN

Dimitri Vittas (Contact Author)

World Bank - Financial Sector Development ( email )

Washington, DC 20433
United States

HOME PAGE: http://www.worldbank.org/wbi/banking/insurance/contractual/vittas.html

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