Contractual savings and emerging securities markets
Vittas, Dimitri
Contractual savings institutions - pension funds and life insurance companies - have long been important institutions in several developing countries. But, with notable exceptions, they have been weak and underdeveloped. Some of this is attributable to low levels of income in developing countries and some of it to the negative impact of repressive regulations and the existence of pay-as-you-go social security systems. The author briefly reviews the size of contractual savings institutions in selected developed and developing countries and assesses their role in the development of the financial sector - especially in the development of securities markets. He stresses five points : 1) the structure of a country's financial system depends on the organization of the country's pension system; 2) contractual savings do not increase the rate of saving but shift the composition of total savings toward long-term financial assets; 3) the role of contractual savings institutions in securities markets reflects historical traditions and differences in regulation; 4) investment regulations must aim at ensuring the safety and profitability of contractual savings; encouraging investment prudence and developing effective supervision should be basic objectives of public policy; and 5) contractual savings institutions can have a great impact on securities markets.
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