Management And Regulation Of Pension Schemes

The framework for the regulation of occupational pension plans The first formal step to regulate occupational pension plans in Canada was taken in 1946 when the Department of National Revenue, which at the time was the agency of the federal government responsible for the administration of the Income Tax Act, issued guidelines to determine whether a plan qualified for the preferential tax treatment [...] One of the conditions for obtaining this registration is that the plan also be registered with the provincial or federal agency responsible for the pension benefit law applicable to the plan, thus ensuring that occupational pension plans comply with all the requirements of the regulatory framework under both the tax and the pension benefit laws.6. [...] The titles of the relevant pension benefit laws and of the agencies responsible for overseeing their application are shown in Table 1. Designation of the plan administrator and the plan trustee The plan administrator is the person, group or entity responsible for managing the affairs of an occupational pension plan. [...] The solvency of the plan is determined as the aggregate of the market value of the plan assets and the present value of future special payments, over the liabilities of the plan where the liabilities are determined on a plan termination basis. [...] Rules regarding the investment of the assets of a plan The overriding objectives of pension benefit laws are to protect the interests of plan members and, in particular, to ensure that the plans will be able to pay the promised benefits when the pensions become due.

'This collection of essays on a rapidly developing topic is a valuable addition to the field and the editors must be congratulated on beginning to bring the area to the attention of thinkers and government (not necessarily the same thing), who are charged with dealing with the challenge of controlling private pension provision.' - Robin Ellison, Pensions

Company pension funds can make important contributions to retirement income and to capital market development. But they need to be regulated and supervised to avoid fraud; protect the interests of workers, and minimize restrictions on labor mobility.

March 1998 Although controversial, investment and other draconian regulations for private pension funds are suitable for countries with weak capital markets and little tradition of private pension provision. But regulations should be relaxed as private pension funds gain in maturity. Like other financial institutions, private pension funds require a panoply of prudential and protective regulations to ensure their soundness and safeguard the interests of affiliated workers. These regulations include authorization criteria (such as minimum capital, fit and proper, and business plan requirements), asset segregation and external custody, professional asset management, external audits and actuarial reviews, extensive information disclosure, and effective supervision. These regulations resemble those applied to banks and insurance companies and are not particularly controversial. But private pension funds in developing countries are often subject to structural and operational controls that are more controversial. Such controls include special authorizations and market segmentation, one account per worker and one fund per company rules, nondiscrimination provisions, regulations on fees and commissions, investment limits, minimum profitability rules, and state guarantees. Vittas discusses the use of such regulations in developing countries that have implemented systemic pension reforms. He draws a distinction between this approach and the more relaxed regulatory regime that relies on the prudent person rule found in more advanced countries. He argues that the draconian regulatory approach can be justified on several grounds, but especially by the compulsory nature of the pension system, the absence of strong and transparent capital markets, and the lack of a long tradition of private pension funds. But the regulations should be progressively relaxed as private pension funds and their affiliated workers gain in experience, sophistication, and maturity. This paper-a product of the Development Research Group-is part of a larger effort in the group to study pension funds and institutional investors.

" "Draconian" regulations have created distortions in asset management, limited opportunities for diversification, and, as a consequence have hampered, the performance of pension funds." This volume shows that the return to retirement assets, expected replacement rates, and, hence, the net welfare gain from pension reform is lower under a draconian regulatory framework than under a more liberal pension fund investment regime. Important policy conclusions of the paper are that existing regulatory regimes should be liberalized as soon as possible to allow pension fund investments in a wider array of financial instruments and that regulations should require evaluation of pension fund performance against market benchmarks as opposed to exclusive focus on comparisons with industry averages. The paper also suggests a review of the current structure of the private pension fund industry in Latin America and an evaluation against alternatives in the light of actual performance experience.