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setting the overall investment strategy, directing the activities of the portfolio managers (both individuals and specialized companies with which it may subcontract); and directing their voting in shareholders' meetings. The individual members retain the rights to: (a) switch trustees, moving to another pension management company; and (b) bring suit against the board of directors for breach of fiduciary duties, either alone or in the context of a class action, where such recourse is permitted by law.<sup>4</sup> This is analogous to the delegation of rights in exchange for taking up fiduciary duties that occurs in the voluntary mutual.fund or unit trust industry.

36. To enable this option, the state's role is to provide a clear body of law that defines the attributes of the fiduciary relationship. Some of these attributes are (a) affirmative duties to disclose, (b) open-ended duties to act, and (c) a promise not to take implicit compensation unless openly disclosed (Clark, 1985). A second role for the state is solid enforcement by the courts. These two roles are more difficult to carry out in small than in large countries, because the specialized human capital needed to operate fiduciary law is more scarce, and the relative lack of independent interests makes the courts less reliable.

37. Still, the state can play a role by providing a specialized superintendency or regulator, which ensures that the boards of directors of the pension management companies discharge their fiduciary duties. In addition, actions can be taken through public disclosure and reports to the regulator to credibly enforce independence of the trustee or board member from related parties in the financial group, nonfinancial companies, or investment managers, as well as provide insulation from other conflicts. _5_ 38. The law assigns the duty to employers and unions. Where the employer or the union is assigned by law to be the sponsor that designates the board of trustees, as in Australia and Switzerland, the danger exists that the members become vulnerable to manipulation by the sponsors. More formally, there are greater principal agent problems in these arrangements. The risk that some of the thousands of trustees created by such a law will fail to fulfill their imposed fiduciary role may be somewhat mitigated by a solid body of fiduciary law, provided it is well enforced by the courts, but the task is very demanding. For example, the Goode Report (1993, Section 4, para. 5.54) declares that "It is unrealistic to imagine that individual trustees will be able to leave behind entirely their other roles.... In the modem world, conflicts of interest cannot be avoided. They can, however, be managed." In practice, even though British trustees have the duty "to act impartially, fairly balancing the interests of different classes of beneficiary" (Goode Report, Section 4, para. 5.4), most base benefils on the last annual salary, a practice that redistributes wealth to those of higher income, as they normally have a steeper age-earnings profile. The most recent (1992) scandal of employer manipulation of pension funds is that involving Robert Maxwell in the United Kingdom.

39. Australia has attempted to mitigate problems associated with trustee selection by employers or unions by allowing members to elect half of the board of trustees. For theU.K., the Goode Report (Section 4, para. 5.40) proposes allowing members to elect a third or two-thirds of the board of trustees, depending upon whether the plan is defined benefit or defined contribution, and only for plans with more than 50 members. In fact, many of the elected trustees are union officials who can also manipulate the pension fund against some classes of members. This has indeed been the case in 4! In many Latin American countries the tradition of the Napoleonic code does not allow for bringing class action suits. _51_ Regulations may, for example, require records of trading by trustees or related parties, as well as by investment managers. Also, regulations can be designed to require certain minimum standards for internal compliance by the pension fund, e.g., internal control systems to prevent abuses by trustees or board members.