Pension Funds and the Impact of Switching Regulation on Long-Term Investment

34 Pages Posted: 24 Jul 2017 Last revised: 3 Aug 2017

See all articles by Alvaro Pedraza

Alvaro Pedraza

World Bank

Olga Fuentes

Superintendencia de Pensiones

Pamela Searle

Superintendencia de Pensiones

Fiona Stewart

World Bank

Date Written: July 11, 2017

Abstract

This paper looks at the impact of members' ability to switch pension fund provider and /or portfolio on the allocation of pension funds to long-term investments. The level of annual turnover in pension fund portfolios was compared with the amount of short-term investments (using government treasury bills and bank deposits as proxy). The investment regulations around switching and other market conduct were then considered. The paper finds that greater movements between pension fund providers and between portfolios is linked to increased holdings of short-term and more liquid assets. Switching appears to be driven by competition, market structure, and investment advice, and, unfortunately, frequently results in poor investment returns for members. The paper makes six recommends for regulators. First, use administrative controls to prevent fraudulent switching between pension providers. Second, provide clear performance and cost comparisons to inform members' choice of provider/fund and encourage informed decision making, which is beneficial for members and the system. Third, supervise and control advertising and marketing (including reporting of performance periods) carefully, to avoid switches based on misleading advice. Fourth, control financial incentives for sales agents, so that switching advice is given in members' interest and not for commercial gain. Fifth, concentrate issuance in government securities, to create more liquid instruments. And sixth, conduct further research on the concept of a central liquidity pool to manage unexpected outflows.

Keywords: Public Finance Decentralization and Poverty Reduction, Macro-Fiscal Policy, Urban Governance and Management, Public Sector Economics, Capital Flows, Non Bank Financial Institutions, Capital Markets and Capital Flows, Public & Municipal Finance, Intergovernmental Fiscal Relations and Local Finance Management, Economic Adjustment and Lending, Municipal Management and Reform, Social Funds and Pensions

Suggested Citation

Morales, Alvaro and Fuentes, Olga and Searle, Pamela and Stewart, Fiona, Pension Funds and the Impact of Switching Regulation on Long-Term Investment (July 11, 2017). World Bank Policy Research Working Paper No. 8143. Available at SSRN: https://ssrn.com/abstract=3006217

Alvaro Morales (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Olga Fuentes

Superintendencia de Pensiones ( email )

st floor, local 8
Santiago, 1449
Chile

Pamela Searle

Superintendencia de Pensiones ( email )

st floor, local 8
Santiago, 1449
Chile

Fiona Stewart

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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