Financial system requirements for successful pension reform

Abstract

This paper examines the financial system prerequisites needed for the successful delivery of funded private pensions. In particular, it examines the financial instruments and investment strategies required during both the accumulation and decumulation stages. It does so within the context of a specific developed economy with a mature pension system, namely the United Kingdom. The lessons learned can help to inform the debate in developing countries that are in the process of undertaking pension reform.JEL: E21, G11, G23

Social network influence and market instability

“…This is particularly true for local pension fund equity allocations and insurance companies. Opening up the opportunities to foreign securities of mid and long range maturities helps insurance companies and pension funds to resolve a problem facing many of them, that is, the mismatch between the duration of their assets and liabilities across the emerging markets (Blake, 2003;Briys and de Varenne, 1996;Kimmis et al, 2002). Another major driving force behind this policy device is the imbalanced, faster growth rate of assets under management compared to the volume and variety of available local securities.…”

Privatisation and pensions: what does this mean for women?

“…Meanwhile, DC schemes benefit from higher levels of portability and flexibility than DB schemes, which may make them more suitable to contemporary patterns of employment and particularly attractive to young employees (Clark and Strauss, 2008). Blake (2003) found that, by changing jobs six times during a person's working life, between 25 and 30% of the full service DB pension is likely to be lost. This is particularly problematic given that many women have complex work histories, including career breaks and shorter employment tenures.…”

Pension Funds and Emerging Markets

“…As a result, pension fund trustees may have become wary of investing in emerging markets for fear of facing substantial short‐term losses (Kimmis et al. , 2002, and Blake, 2003). In the United States, fear of litigation in case of serious short‐term underperformance increases the risk perception of pension fund managers.…”

“…Perfect asset‐liability matching both in size and volatility is not feasible. However, investments in domestic assets match better domestic liabilities than investments in foreign securities (Blake, 1999 and 2003, and Davis and Steil, 2001).…”

“…Regardless of whether the asset allocation is decided by the pension plan sponsor, or the pension plan member, as is the case in the 401(k) pension plans in the United States, the investment risk is borne exclusively by the pension plan member. Therefore, the appropriate investment strategy in defined‐contribution plans is to maximize the expected return of the portfolio for a given level of risk, as suggested by modern portfolio theory (Blake, 2003, and Davis and Steil, 2001). Ceteris paribus, pension funds offering defined‐contribution plans would invest more in foreign securities (and emerging markets) than pension funds offering defined‐benefits plans.…”