Pension fund governance: moral imperatives, state regulation, and the market

Pension funds are remarkable institutions. Charged with the welfare of plan beneficiaries and retirees, they carry a heavy burden of responsibility. And yet, unlike many government institutions, they have considerable discretion in fulfilling their goals and objectives. Even if their independence is circumscribed by statutory requirements, their autonomy is a distinctive aspect of Anglo-American economies one, at times, envied by representatives of other economic systems. In this paper, I look at the economic principles underpinning pension fund governance beginning with models of governance. I argue that the golden-rule of fiduciary duty (model 1) and its constituent moral imperatives are insufficient for governing pension fund performance. I show that there is a complementary relationship between fiduciary duty and second-order statutory rules and regulations (model 2). And I show that the apparent limits of both suggest the market (model 3) may have an important role to play in pension fund governance. The asymmetrical distribution of information between pension fund institutions and their beneficiaries and related stakeholders means that no one model of pension fund governance is likely to be successful. In the penultimate section of the paper three regimes of governance (combinations of the three models) are identified and distinguished, illustrated by reference to the increasing pressure on pension funds to balance the interests of three generations of potential and actual beneficiaries. In conclusion, implications are drawn for the design of an efficient and equitable regime of pension fund governance. Acknowledgements. This paper was prepared as a background paper for a project with John Marshall on pension fund trustee decision making sponsored by the UK National Association of Pension Funds. A version was first presented to the World Bank’s conference on a "Contractual savings: supervisory and regulatory issues in life insurance and private pensions” Washington DC, November 2003. Subsequent revision and production of the paper was supported by CSFB (London) as part of the Oxford Handbook of Pensions and Retirement Income co-edited by G. L. Clark, A.H. Munnell and M. Orszag. Thanks are also due to the insights and knowledge of my colleagues near and far including Ewald Engelen, Tessa Hebb, Alicia Munnell and Noel Whiteside. None of the above should be held responsible for any errors or omissions.