Pension Reform and Capital Market Development "Feasibility" and "Impact" Preconditions

25 Pages Posted: 20 Apr 2016

See all articles by Dimitri Vittas

Dimitri Vittas

World Bank - Financial Sector Development

Date Written: November 1999


Private pension funds are neither necessary nor sufficient for capital market development. But if they are subject to conducive regulations, adopt optimizing policies, and operate in a pluralistic structure, they can have a large impact on capital market modernization and development once they reach a critical mass.

The link between pension reform and capital market development has become a perennial question, raised every time the potential benefits and preconditions of pension reform are discussed. Vittas asks two questions. First, what are the basic feasibility preconditions for the successful launch of a pension reform program? And second, what are the necessary impact preconditions for the realization of the potential benefits of funded pension plans for capital market development?

His main conclusion is that the feasibility preconditions are not as demanding as is sometimes assumed. In contrast, the impact preconditions are more onerous. The most important feasibility precondition is a strong and lasting commitment of the authorities to maintaining macroeconomic and financial stability, fostering a small core of solvent and efficient banks and insurance companies, and creating an effective regulatory and supervisory agency. Opening the domestic banking and insurance markets to foreign participation can easily fulfill the second requirement. The main impact preconditions include the attainment of critical mass; the adoption of conducive regulations, especially on pension fund investments; the pursuit of optimizing policies by the pension funds; and a prevalence of pluralistic structures.

Vittas also argues that pension funds are neither necessary nor sufficient for capital market development. Other forces, such as advances in technology, deregulation, privatization, foreign direct investment, and especially regional and global economic integration, may be equally important. But pension funds are critical players in symbiotic finance, the simultaneous and mutually reinforcing presence of many important elements of modern financial systems. They can support the development of factoring, leasing, and venture capital companies, all of which specialize in financing new and expanding small firms.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study the impact of institutional investing on capital markets. The author may be contacted at

Suggested Citation

Vittas, Dimitri, Pension Reform and Capital Market Development "Feasibility" and "Impact" Preconditions (November 1999). World Bank Policy Research Working Paper No. 2414. Available at SSRN:

Dimitri Vittas (Contact Author)

World Bank - Financial Sector Development ( email )

Washington, DC 20433
United States


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