Managing public pension reserves Part I: Evidence from the international experience

Many pension schemes mandated by governments have accumulated large reserves. The management of these funds has a direct effect on financial sustainability and potential benefit levels. It also has important indirect effects on the overall economy when the funds are large. Part I of this study surveys some of the available cross-country evidence on publicly-managed pension reserves. We find that publicly-managed pension funds (i) are often used to achieve objectives other than providing pensions (ii) are difficult to insulate from political interference and (iii) tend to earn poor rates of return relative to relevant indices. These findings are consistent across countries of all types, but returns are especially dismal in countries with poor governance. The experience to date suggests that the rationale for prefunding have been seriously undermined by public management of pension reserves. Countries with serious governance problems should probably avoid funding altogether. ________________________________________________________________________________ * Authors are Director, PrimAmerica Consulting Services and Economist, Social Protection Unit, Human Development Network, World Bank, respectively. Robert Holzmann, Estelle James, Olivia Mitchell, Sylvester Schieber, Yvonne Sin and Juan Yermo provided useful comments.