Pension Regulation and Investment Performance Rule-Based vs. Risk-Based
The regulatory environment for funded pension schemes varies across countries. While the purpose of pension provision institutions worldwide is broadly similar, i.e., to safeguard retirees’ welfare, national regulations are heterogeneous. In this paper, we analyze the extent to which the type of regulation and its quality can influence a pension system’s financial performance in a cross-country analysis.
We investigate the relationship between rule-based versus risk-based regulatory choices in different countries and the real investment performance of their pension funds. Pension systems in countries with more mature risk-based regulatory regimes tend to demonstrate superior investment performance. The benefit of implementing risk-based regulation is more pronounced in countries with low regulatory quality. The core of rule-based regulations, i.e., quantitative investment limits, has no significant impact on the Sharpe ratio of pension investment returns.
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