4.4. Regulations

Regulation of Pension Funds varies much across the countries. The OECD last survey of investment regulations of Pension Funds was performed in 2011 and the report describes the main quantitative investment regulations applied to pension funds in OECD and selected non-OECD countries as of December 2010⁸⁸.

Regulations range from very strict, centralized systems in which a centralized public agency or a national provident fund administer and manage investments. This type of regulation is found in Eastern Europe and Central Asia as well as the national provident funds in Singapore and Malaysia. The other extreme is a regulatory vacuum, mostly found in countries that just start building their Pension Systems. Now found in some developing and transitional countries (e.g. Russia where several hundred pension funds have been established on the basis of rudimentary legislation and with no effective supervision)⁸⁹.

In between these extremes some countries follow more strict regulation covering most aspects of their operation, (Chile and other Latin American countries) or they rely on the so-called "prudent man" with additional investor protection rules (North America).

In developing countries regulation may be more justified because of lacking experience of the investors (what might lead to poor portfolio decisions) and because of less developed capital markets which are more risky than investing in more developed countries.

Regulation works in general by applying quantitative limits⁹⁰:

• Portfolio ceilings on pension fund investment by broad asset classes; these are equity, real estate, bonds, retail investment funds, private investment funds, loans, bank deposits
• Quantitative restrictions on foreign investment; it applies a total limit and a limit per asset class
• other quantitative restrictions classified by type of regulation

The differences in regulation are large, e.g. Australia does not impose a limit on any asset class (only Loans or financial assistance to members and their relatives are not permitted) but only require diversification of assets. This must be documented in the Board approved risk management strategy for each fund.

On the other hand, the regulation that Chile imposes on the Pension Funds is strict and does not permit investment in real estate and private investment funds.

⁸⁸ OECD, SURVEY OF INVESTMENT REGULATION OF PENSION FUNDS, June 2011
⁸⁹ Dimitri Vittas Regulatory Controversies of Private Pension Funds Development Research Group, The World Bank, January 1998
⁹⁰ OECD, SURVEY OF INVESTMENT REGULATION OF PENSION FUNDS, June 2011