Improving governance in mandatory defined-contribution pension fundsPetar-Pierre Matek
Abstract: Demographic changes and other socio-economic factors put a strain on pension systems around the world. Developed countries are particularly affected by population aging and generous existing pay-as-you-go schemes. To achieve a more sustainable pension system, many countries introduced defined-contribution pension plans. The World Bank, which took a leading role in conceptual and operational aspects of pension reforms worldwide, provided support to many countries, including Croatia, in the implementation of its three-pillar model. At the same time, Anglo-Saxon countries witnessed a dramatic shift from defined-benefit to defined-contribution pension schemes. As a result, employees are bearing investment risk, meaning that their pension benefits directly depend on the investment performance of pension plans invested in capital markets. Consequently, issues related to the governance of defined-contribution pension plans have become a matter of concern for researchers and regulators worldwide. The main questions are: (1) whether a governance system can be created that will work for the benefit of fund members and (2) where should policy makers and pension supervisors focus their efforts. Because asset management is characterised by significant conflicts of interest and low observability of money managers% actions, agency theory provides an excellent theoretical framework for the research of governance issues in second pillar pension funds. It helps in identifying the stakeholders, describing their relationships and identifying where their interests are not aligned. Most importantly, it provides a framework for identifying the most suitable control mechanisms to curb conflicts of interest. Theory suggests that behaviour-based control mechanisms will be best adapted in the case of pension funds. Of importance are: (1) internal governance structure and mechanisms, including third-party monitors, (2) regulation and supervision and (3) duties and liabilities of the governing body. The definition of investment performance benchmarks is the most obvious outcome-based control mechanism. Information systems have an important role in increasing the monitoring capacity of stakeholders. Theory suggests that third-party monitoring, such as supervision by public agencies, is particularly important, because pension funds are characterised by a failure of market control mechanisms. In addition, the interpretation of money managers% fiduciary duties by courts of justice will have an extremely important impact on the credibility of regulatory and supervisory efforts. Legislation plays a leading role in the design of control-mechanisms. This is particularly the case in civil law jurisdictions that opted for a highly prescriptive approach to regulation. The case study of the Croatian second pillar pension funds is based on an analysis of the Croatian Act on Mandatory Pension Funds and its comparative analysis with the OECD Core Principles of Private Pension Regulation, the UCITS Directive and the IORP II Directive. It breaks down the provisions of these legislative acts and standards along the lines of the framework provided by the agency theory - namely, the information available to fund members, internal governance mechanisms, political pressures and tools available to the regulator (including liability of the managing body). Evidence from the research supports the hypothesis that the Croatian Act on Mandatory Pension Funds addresses in an adequate manner most of the governance issues related to the management of second pillar mandatory pension funds. Nevertheless, some deficiencies were revealed, and a list of recommendations was outlined. The application of agency theory to pension funds and the comparative analysis of legislative documents adds to the body of literature on second pillar pension funds by providing an innovative approach to the issue. It also provides guidelines for regulators introducing defined-contribution pension schemes or trying to improve existing ones.
Found in: ključnih besedah
Keywords: pension funds, governance, agency theory, World Bank, pension system, Croatia, doctoral dissertation
Published: 12.03.2019; Views: 1639; Downloads: 111
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