Stiglitz on pensions

Michael Pollak mpollak at
Sun Apr 9 20:10:54 PDT 2000

[I found the assertion that 40% of the benefits of private pension fund schemes in Britain had been eaten by fees to be jaw-dropping.]

Financial Times, 06-Apr-2000

Bank rethink urged on pension funds

The World Bank's former chief economist yesterday called on the bank to rethink its promotion of private pension funds in developing countries, saying it had been motivated partly by ideology.

Joseph Stiglitz, who retired this year from the bank and is now at the Brookings Institution think-tank in Washington, said his former employer had put excessive emphasis on mandatory, fully funded private pension fund programmes in developing countries.

Speaking on a panel where he was joined by opponents of the privatisation of the US social security system, Mr Stiglitz identified four main problems that had arisen in countries where the bank's advice had been followed:

* Heavy transactions costs. He cited a study showing that 40 per cent of the benefits of private pension schemes in Britain had been eaten up by transactions costs charged by fund operators, and said better ways had to be found to keep such costs down.

* Volatility. Private pension funds invested in developing country markets were subject to highly volatility, which potentially endangered retirement incomes.

* Regulatory issues. These were especially critical in countries where investors were unsophisticated.

* A lack of insurance. "There is a recognition that the private market doesn't provide many types of insurance that individuals need and want for their retirement," he said.

He said advocates suggested that the volatility question should be addressed by allowing fund managers to diversify portfolios internationally, but added it was difficult politically to argue that developing countries should be exporting capital to countries such as the US.

He suggested swapping equities between pension funds in different countries, so addressing the need for portfolio diversification but avoiding export of national savings to other countries.

Those favouring fully funded individual pensions had argued that this got around the incentive problems caused by many publicly funded systems, where individuals saw it in their interests not to contribute.

However, he said another incentive problem was developing because many private pension fund holders would not have adequate incomes for their retirement. This would probably require government bail-outs to resolve.

He said the World Bank had been guided to some degree by ideology. "I think there has been an element of ideology in pushing that. Anyone looking at the agenda would have to agree with that," said Mr Stiglitz.

Mr Stiglitz said the move towards privatisation had been motivated by a long history of failed government pensions schemes, but he said one objective of the bank should be to improve the quality of bureaucracies operating public programmes.

Copyright © The Financial Times Limited

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