Veritas propter investigationem [Truth through research]
TitleShould Pension Investing be Regulated? (2009)
AuthorsPhilip Davis
 Yu-Wei Hu
InstitutionRotman International Centre for Pension Management
TopicsRegulatory issues
 Investment restrictions
 Fiduciary issues
Date Published2009
Date posted on PR14 Oct 2014
Davis, P Hu, Y, (2009). Should Pension Investing be Regulated? (2009) Rotman International Centre for Pension Management,

PensionReforms’ summary and comments

Governments normally have direct and indirect stakes in the success of private pension schemes.  Nearly every country confers significant tax advantages on Tier 3 pension savings and even, inexplicably, on Tier 2 (compulsory) scheme contributions and accumulations.  Those favours give governments an indirect stake in those assets; to ensure the tax breaks are ‘well spent’.


There is an even more direct link where the Tier 1 pension is income- and/or asset-tested.  In that case, the more private provision a retiree has, the less money taxpayers have to deliver at Tier 1.  In a way, that justifies a government’s intervention in the accumulation period – to reduce the burden on tomorrow’s taxpayers.


There are several potential risks involved in the management of private pensions.  For example, the funds may be misappropriated, applied to inappropriate purposes or even escape the net and be applied to something other than increasing retirement incomes.  All these can justify government regulations on the conduct and reporting in relation to such schemes.


Then there is the investment risk – the possibility of poor investment performance and the associated fiscal consequences for the government.  Unexpectedly poor returns also involve a consumer-protection component.


“If these funds are poorly managed and unable to pay pensions to retirees, government may have to step in.”


The report identifies two main ways of regulating on the investment risk (in addition to the solvency regulations).  The first is “…to impose quantitative asset restrictions (QAR, involves direct limits on holdings of specific assets).”


The second approach “…is to establish prudent person rules (PPR, requires following prudent investment policies and practices).”


This report looks at “…the pros and cons of both approaches, considering finance theory and empirical evidence. Both theory and empirical evidence suggest the PPR approach is likely more efficient.”


PensionReforms agrees.  The QAR approach assumes that someone in the government knows better than the legal and beneficial owners of the assets what investment strategy is appropriate for every style of asset pool and that clearly cannot be the case.  The government may justify such an intervention from the ‘investment’ through the expensive tax breaks but should instead devolve the responsibility for achieving optimal outcomes to those closest to the action.


For a Defined Benefit scheme, where the sponsor bears the investment risk, QAR impliedly increases the risk of suboptimal returns with no compensation to the sponsor.  For a Defined Contribution scheme, it is the beneficiaries whose returns are compromised by that intervention.


None of this should prevent a government from highlighting the good or poor performance of those entrusted under the PPR regime and comparing comparable returns. (File size 213 KB; 10 pp) 701