Selected Issues on the Regulation and Supervision of Pension Funds
National pension systems are typically characterized as multipillar structures that are defined in many ways, depending on the purpose of analysis. From the perspective of analyzing financial stability and development, it is useful to distinguish between (a) state-provided pension schemes, which are a combination of a universal entitlement and an earnings related component; (b) occupational pension funds, which are funded by and organized in the workplace as Defined Benefit (DB), Defined Contribution (DC), or a hybrid; and (c) private savings plans, which are often tax advantaged. As a result of increasing longevity and rising dependency ratios, the funding of promised retirement benefits (in DB plans) has become a challenge in many countries. This funding challenge has led to pension reforms that reduce benefits, increase contributions (i. e., taxes to pay state pensions), redefine risk sharing between sponsors and beneficiaries, and raise retirement age. Increased funding of pension obligations (by both the private and public sectors) and greater retirement savings by individuals are increasingly part of the solution.
While funded pension plans’ size and importance vary greatly among countries, in many countries pension funds are among the largest institutional investors. As a result, pension fund asset allocations could affect financial markets and the flow of investment funds quite significantly. As pension funds became increasingly underfunded and shift toward DC and hybrid plans, the issues of appropriate asset liability management and asset allocation have become pressing. As a result, both pension fund management and the approaches to its regulation have changed. The regulatory framework for pension funds is increasingly focusing on risk management, in addition to the traditional focus on protection of pensioner and employee benefits and rights. Key issues in assessing pension funds’ regulatory framework from a financial sector perspective and the emerging practices are covered in appendix H.