Cultural determinants of pension supervision and regulation EAEPE Conference Vienna 2011 Conference on Schumpeter's Heritage The Evolution of the Theory of Evolution Monetary Economics, Finance and Financial Institutions Session 2 Fieke VAN DER LECQ, Jairo RIVERA ROZO, Onno STEENBEEK

Introduction Pension systems = pension contracts + institutional setting Cross-country variation in the way pension systems are arranged and executed. An example of this is the level of intensity and strictness of pension regulation and supervision. Styles of pension regulation and supervision are related to a country’s level of economic development, depth of financial markets and legal system. And to their culture? 2

Culture and values  Culture comprises the collective mental models which differentiate the members of a group or category of people from another (Hofstede et al., 2010)  Mental models  practices and values  Hofstede (1980, 2001) 4 dimensions of culture:  Power Distance (PDI)  Individualism vs. Collectivism (IDV)  Masculinity vs. Femininity (MAS)  Uncertainty Avoidance (UAI) 3

Bringing culture in economic analysis  Culture as constraints  North (1990): institutions are the humanly devised constraints that shape human interaction  Institutions can be formal  written rules and legislation informal  sets of values and beliefs  culture  De Jong (2009): changes in economic outcomes are very unlikely to produce changes in culture  Culture as preferences Culture influences the perceptions and design of institutions, economic behavior and, ultimately, stimulates the outcome of economic processes 4

Pensions and Culture  What did we do?  What for?  Exportability of good practices in national pension systems  Which factors of pension system in Country A are more likely to be successfully implemented in Country B 5 Culture (values and beliefs) Pensions supervision and regulation Correlations

Pension regulation and supervision  Regulation: rules and standards that pension organizations ought to follow  Supervision: actions taken to guarantee the compliance with these rules Two main approaches (Demarco et al., 1998; Rocha et al., 1999; Vittas, 1999) 6 Pro-active  Extensive regulation  Closed supervision  Close communication with the pension funds Re-active  Less intrusive  Self-regulation  Intervention is exception based

Data and Method Data  Regulation  limits on pension funds investments - OECD  Supervision  intensity of supervisory activities - World Bank  Licensing  Monitoring  Analysis  Communication  Intervention  Correction  Culture  Hofstede’s cultural dimensions Method Spearman’s correlation coefficient rho 7

The relation with culture: hypotheses Expected correlations for strictness of pension regulation and intensity of pension supervision Dimension Direction of Correlation Rationale IDVNegative Competition, individual interests MASNegative Competition PDIPositive Larger proportions of supervision personnel UAIPositive Extensive set of rules and laws 8

Results Regulation (N=28) PDIp-valueIDVp-valueMASp-valueUAIp-value Investment Strictness Index Supervision (N=8) Licensing Monitoring Analysis Intervention Correction Communication Supervision Intensity Index Blue: 5% significance level Red: 10% significance level 9

Conclusions and implications Signs of the correlations are the expected ones Supervisory and regulatory activities seem to have the same relationship with cultural dimensions The findings suggest the following regarding national pension systems: o There is no uniform recipe for optimal regulation and supervision, since these are related to culture, o There are limits to global standardization of pension fund supervision and regulation (e.g. European level solvency requirements, accounting practices), and o Pension system reforms should be evaluated carefully before implementation 10

Further work  Enlarging the dataset for pension funds supervisory activities (currently N=8)  Identifying patterns of association between pensions systems’ characteristics and country specific features (geographical location, legal system, language, religion, etc)  Exploring the relations between culture and other elements of pension systems, i.e. asset allocations of pension funds vs. risk aversion. Thanks for your attention! Questions? 11