Gregorio Impavido, Alberto R. Musalem, and Dimitri Vittas resulted in the survival of a very small number of funds. A consolidated and highly concentrated pension system based on a small number of open funds enjoys economies of scale and may avoid excessive marketing costs. But such a system poses a serious policy challenge: how to ensure the continuing offer of competitive and efficient services. One solution to this dilemma could be to promote contestability by allowing employers to opt out from the open end system through the offer of employer-sponsored plans as well.

Economies of scale and scope are large in many areas of the supply of pension services like collection of contributions, data processing, maintenance of records, channeling of funds to asset managers and payment of benefits. Countries may not be able to successfully attract investment from highly reputable foreign companies in these area because of their small size. Whenever the small size of a country does not justify the sunk costs that characterizes some of the pensions services it might be necessary to allow foreign firms to centralize these services in a foreign location. Using centralized services in another country would reduce operating costs, both because of greater economies of scale and because of the location of such centralized services in countries with lower labor costs.

Countries with small financial systems may also have a small pool of human capital with the necessary expertise to manage pension funds. The countries need to contract reputable foreign companies, either to join local ventures or directly abroad. These companies would know how to operate efficiently systems with a large number of individual accounts. They would have experience in cross selling and exploiting both economies of scale and scope. They would have a well established expertise in asset management. They would be in a better position to resist government pressure and political interference in their day-to-day operations. They would also be better able to integrate their local operations with their global activities and, by implication, with global markets. In their ativity,foreign institutions would train local staff and contribute to the improvement of the quality of skills. Finally, by attracting reputable foreign companies, reforming countries would reduce the costs of supervision which may take time to develop to meet adequate standards. The host country would have to rely on the providers' home country supervisory authorities; hence would need to enter into agreements with each of them to share information about the solvency of intermediaries.

Finally, countries with small financial systems need to ensure that the fiduciary responsibilities of fund managers are properly met. Contractual savings in developing countries are often seen as a captive source of funds for targeted development of specific industries, sectors, or markets. Contractual savings represent long term savings that should be managed in the best interest of beneficiaries and not used as development tools. They are not developmental tools. In this sense it is very important that the supply of trustee services and governance be maximized. Trustees need to be independent from political interference and this can often be achieved by allowing for competitive selection of pension funds management companies by individual contributors.

# **REFERENCES**

- **[1] Aizenman, J., and P. E. Guidotti** (1994) Capital Controls, Collection Costs and Domestic Public Debt. _Journal of International Money and Finance,_ 13: 41-54.

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