Responsibilities of Pension Fund Regulators

In the previous article, we have already determined why it is important to closely monitor the workings of pension funds and also to regulate them. However, regulation is a broad concept. It encompasses a wide variety of actions that need to be undertaken. In this article, we will have a closer look at various activities which are generally clubbed together when the word regulation is mentioned.

The details of the various activities which need to be performed by regulators have been mentioned below. The below-mentioned list is only indicative in nature. It is by no means meant to be an exhaustive list enumerating all the tasks performed by the regulator.

  1. Licensing of Operators: Pension funds have to obtain a license before they can start providing services to investors. The pension fund regulator undertakes the task of studying the financial details of the prospective service provider.

    The regulator lays down the conditions which need to be fulfilled before a license is obtained. The regulator clearly mentions the financial as well as non-financial capabilities which will be verified before a license is granted. It is the regulators’ duty to judge each application on its merits and then either provide or deny a license to the pension fund.

  2. Investing Rules and Regulations: The pension fund regulator lays down the rules and regulations based on which pension funds can create their own investment strategy and policy.

    Pension funds do have the flexibility to build their own strategy. However, that needs to be done within the framework of the rules and regulations which have been set up by the regulator. In the absence of a regulator, it would be difficult to set up these ground rules which form the basis of risk management at pension funds.

  3. Segregation of Assets: Pension funds control and manage the assets belonging to various clients. Hence, there is a need for rules and frameworks to ensure that the commingling of assets belonging to different customers is managed properly.

    Defined contribution pension funds allow different types of investors to take different amounts of risks. It is for this reason that it is important to segregate their assets. Pension fund regulators create rules which govern this segregation. They also oversee this segregation exercise to ensure that the assets of any investor are not unnecessarily jeopardized.

  4. Custody of Assets: Pension funds own securities worth trillions of dollars. However, they do not have custody of these assets. The pension fund regulator wants to ensure that the securities belonging to investors are not embezzled. Hence, they instruct pension funds to utilize the service of specialized custodian organizations.

    Only organizations which have a good track record of managing securities as well are in a good financial position are allowed to become custodians of pension fund assets. Having an efficient custodian is very important to ensure that no fraud takes place within the pension fund.

  5. Reporting and Disclosure: Pension fund regulatory authorities have the power to create reporting and disclosure requirements. There are standard reporting and disclosure requirements that are followed all across the world. However, each country may have its specific needs. This is the reason that sometime the regulations may have to be modified.

    It is the job of the regulator to ensure that the reporting is sufficient so that the investments of the investors are not jeopardized. However, at the same time, the reporting should not be excessive so that the functioning of the pension fund is slowed down.

  6. Fees and Expenses: Pension fund investors typically manage their investments passively. This means that they pay into the pension fund via a payroll deduction. Once they have paid into the fund, they do not generally pay attention to how their investments are being allocated. They also do not generally pay attention to the types of fees that are being charged by the pension fund.

    Hence, there is always a chance that the pension fund may take advantage of the situation and start charging excessive fees. Here, it is the job of the pension fund regulator to ensure that this does not happen.

    Pension fund regulators set the maximum limit of fees and expenses which can be collected by the funds. This helps keep the expense ratio in check which ultimately leads to higher returns for the investors.

  7. Guarantees: Pension fund regulators also create insurance schemes via which they guarantee the pension amount to a certain extent. Every pension fund is expected to pay a percentage of its collections as a premium. In return, if these funds default due to poor economic conditions, their liabilities are picked by the regulator to a certain extent. This collective insurance increases the confidence of individual investors. As a result, they end up contributing more to their pension funds.

  8. Dispute Resolution Mechanism: Finally, it is possible that an individual may have a dispute with their pension fund. In such cases, they need recourse to a third-party organization that can hold unbiased hearings and passes judgements. The pension fund regulatory bodies serve as an effective grievance redressal mechanism for the millions of people who invest in pension funds.

The bottom line is that pension fund regulators perform several very important tasks. Their existence and smooth functioning are very important for the working of the pension fund industry.

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Pension Funds