Financial Market Implications of Pension Reforms

Hans Blommestein ()

Istanbul Stock Exchange Review, 1998, vol. 2, issue 8-7, 79-89

Abstract: The move towards funded system and the associated growth of pension funds' financial assets has made the financial market aspects of retirement income systems a key policy area. The expansion of a funded pension sector requires the existence of a sophisticated financial market infrastructure. More generally, the importance of pension assets for financial markets may not been given enough policy attention in some countries, which has often focused more on the reform of public pension systems as a means of addressing fiscal problems associated with ageing populations. This paper focuses therefore on the main financial policy challenges arising from the rapid growth of pension fund assets. Several key issues arise: how demographic developments affect the case for greater reliance on advance-funded systems; the macroeconomic implications of a major growth in their importance, including the impact on international capital flows; and the implications for retirees who rely to a major extent on income from advance-funded systems, as opposed to other sources of income. Against this backdrop, policy makers will need to assess the policy implications of: the likelihood that governments may find themselves “bailing out” pension institutions that are unable to meet their obligations; the way in which investment policies of funds should be regulated, and the role of risk management and risk accounting. Moreover, the growing reliance on private pension schemes calls for an assessment of the adequacy of the regulatory framework, while an effective supervisory oversight of the financial situation of pension funds is indispensable for the development of sound private systems. Finally, the implications for the financial markets themselves of the accumulation of vast amounts of savings by pension funds that will need to be invested in financial markets means that financial policy makers need to understand the investment and trading strategies of pension funds and other institutions involved in the provision of retirement income.

Date: 1998
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