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Traditionally a voluntary complement to social security systems, private pension arrangements are being promoted around the world to play a more central role in retirement income provision. One key policy concern of this trend is how risks inherent to funded pension systems will be addressed. These risks can be categorized into two main types, financial and operational. In the former category are investment-related risks that may be compensated by a premium on expected returns and may therefore be worth taking on, especially for long-term investors. In the latter category are governance and agency problems that may worsen performance and pension benefits. Pension regulation and supervision in many OECD countries has often focused on the former while failing to recognize the importance of operational risks. A case at hand is the quantitative investment limits that in some jurisdictions may drain the pension supervisors' resources. The OECD has recently issued a set of core principles that set out good practices in pension regulation that aim to rebalance the policymaker's approach to dealing with financial and operational risks. The principles and related guidelines focus on promoting high-quality managerial processes and effective internal governance and external monitoring. In addition, the guidelines identify a set of basic rules to protect the rights of members and beneficiaries and prudential standards to promote high levels of funding and appropriate investment strategies that take into account the structure of the pension plan's liabilities.
New trends in private pension design and recent regulatory initiatives
Private pension arrangements are living through difficult times. In many countries, defined benefit plans are being scaled back or replaced by typically less generous defined contribution arrangements. The consequences of this trend and the emerging risk transfer to households are as yet open questions, but seemingly low levels of financial literacy and inconsistent or irrational individual behaviour may call for careful design of defined contribution plans, especially those that offer product or portfolio choice. In particular, there is gathering evidence that a small number of well-crafted choices may boost individual welfare by simplifying complex or stressful decisions. There is also much debate about the design of default options. In some countries, life-cycle solutions (portfolios become less risky over time) are becoming increasingly popular. In other countries, default options that...