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# **1. Institutional Infrastructure to Support Pension Services**

153. In small countries, it is often assumed that lack of institutional infrastructure in such areas as payment systems; lack of custody arrangements for securities; inadequate registries to identify contributors, employers, and pensioners; lack of a broad array of assets for investment; and inadequate financial information for the efficient provision of insurance or fund management services will preclude the option of privatizing pension services (see Britran and Arrau, 1993).

154. The preconditions for the institutional infrastructure needed in small countries to permit partial or total privatization of pension services are no greater and can even be less than those required in large countries. Some important types of infrastructure can be imported by permitting freer trade in international financial services, including: custody services, offshore markets in which to invest in local or foreign currency-denominated securities, and account processing services. Some services, such as registries of contributors and pensioners, are far more difficult to import, but other services, such as supervision, can be "imported" if investment management services are contracted out to foreign firms.

_155._ Institutional infrastructure and capacities needed within government agencies, e.g., domestic infrastructure to support a domestic securities market, and accounting, auditing, and actuarial or valuation services, are shown to be highly dependent upon the exact type of pension reform proposed and not only upon permitting poor small countries to have a "three pillar approach,' as advocated in a recent World Bank study (1994). That approach can involve a pay-as-you-go first pillar, a mandatory defined-contribution second pillar, and a voluntary occupational plan third pillar. This is especially true if the small country has no infrastructure to _enforce_ a tax transfer system, cannot conduct effective financial supervision, and does not have proper registries of contributors or pensioners. By contrast, pension systems that do not entail any mandatory contributions and involve freedom to contract with offshore providers of pension services imply far fewer infrastructure needs.

# 2. **Supply of Pension Services**

156. A number of important policy recommendations relating specifically to the supply of pension services, including trustee services, involve establishment of a fiduciary obligation between contributors and pension plan trustees designated by the govemment. Among the most important findings in this area are:

- (a) There is a need to ensure reduced concentration in the trustee function by considering the mandated unbundling of some pension services such as collection and payment services, while perrnitting international competition in the provision of other services, e.g., investment management and insurance. This recommendation results because permitting vertical integration back to the point of collections in small countries can increase overall costs in the pension industry and result in a much smaller number of trustees and investment management entities, thereby creating incentives for collusion, particularly in small countries that lack independent interests.

- (b) Small countries with a lack of independent interests need to give attention to tie number of trustees, how they are selected, and the supervisory, regulatory, and