A Global Perspective on Financial Regulation
Edited by John Evans, Michael Orszag and John Piggott
Chapter 6: Governance of Public Pension Plans: The Importance of Residual Claimants
Gregorio Impavido In most developing countries, public pension funds are used for developmental and social objectives that are often not consistent with the provision of adequate, affordable and sustainable retirement income for plan members. The problem of public pension fund management appears to be related to a weak control structure for the plans. This is often inadequate to resolve the conflict of interest between management and stakeholders stemming from the separation between management and control and the coordination failure caused by a dispersed set of stakeholders. In particular, although representative boards should allow for appropriate monitoring by active members, it is often the case that politics rather than sound portfolio theory guides asset allocation. This chapter has three main sections. In the first, I provide a summary exposition of the corporate governance mechanisms that, in the economic literature, are identified as useful in limiting the conflict-of-interest problem stemming from the separation of ownership and control, and from the dispersed nature of ownership. This section does not claim originality and draws considerably on Becht, Bolton and Röell (2003) and Shleifer and Vishny (1997). In the second section of the chapter, I summarize the results of a survey of the governance practices of a large sample of public pension plans in less developed countries and discuss the relationship between poor governance and the performance of public pension funds. In the third section, I attempt to draw lessons from the economic literature on corporate governance that can be used to improve the...
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