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Regional windows
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Pension funds in Central Europe and Russia : their prospects and potential role in corporate governance
| Author(s): | Vittas, Dimitri|Michelitsch, Roland |
| Organization: | Policy Research Working Papers, World Bank |
| Year: | 1995 |
| Region(s) of Coverage: | CEE |
| Themes: |
Governance, International Affairs, Macroeconomics and Economic Growth, Labor & Social Protections, Development Finance & Aid Effectiveness, Private Sector Development, Urban Development and the Global South, Information & Communications Technology (ICT), Innovation
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Overview
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Read This Document
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Papers by Same Organization
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| The severe financial pressures on the social pension systems of transitional countries in Central Europe and Russia could be alleviated by down sizing and restructuring the public pillar of the system and by creating private pension funds. Private pension funds could help modernize capital markets and also help improve corporate governance. Social pension systems in most countries in Eastern Europe and the former Soviet Union face severe financial pressure. Ageing populations are increasing that pressure, which stems mainly from design flaws and incompatible incentives in the systems. Vittas and Michelitsch describe the features of the pension systems that have led to the current dire predicament: a big discrepancy between system and demographic dependency ratios, unsustainable targeted replacement rates, the high contribution rates needed, growing evasion, and growing deficits. Radical basic reform is inevitable, they say, but may not be politically feasible or even advisable in the short run. After reviewing experience in other countries, they conclude that restructuring and down sizing the social pension system will leave adequate but affordable (thus sustainable) benefits and will allow for the creation and growth of private pension funds. The shortcomings of company based defined benefit plans (limited portability, restricted vesting, inadequate funding) suggest that transitional economies should opt in the longer run for non employer, defined contribution plans based on individual capitalization accounts with full immediate vesting, full portability, and full funding. To cope with the need for a targeted replacement rate, such schemes could operate with variable contribution rates, reset each year in accord with the salary growth of each worker, the cumulative investment return on his/her account, and the targeted pension benefit. Once private pension funds are established, long-term financial resources should accumulate rapidly. They can then play a major role in modernizing securities markets, stimulating innovation, fostering better accounting and auditing standards, and promoting more disclosure of information. They could also greatly help improve corporate governance and the monitoring of corporate performance. Their ""voice"" in corporate affairs could be exercised more effectively through collective bodies. They could thus help create more robust structures of corporate governance, lower monitoring costs, and avoid the problems caused by ""free riding."" This paper is a product of the Financial Sector Development Department. It is a slightly revised version of a paper presented at the Conference on Corporate Governance in Central Europe and Russia, December 15_16, 1994, organized by the World Bank and the Central European University Privatization Project. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Priscilla Infante, room G8118, extension 37642 (50 pages) The full report is available on the World Bank FTP server Provided by Eldis, a GDNet content partner |
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| Reforms of institutional settings and regulatory frameworks |
| By Busse, M.| Groizard, J. L., 2006 |
| Produced by: Policy Research Working Papers, World Bank |
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| Themes: Macroeconomics and Economic Growth |
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