providers is to require interoperability between systems and the maintenance of a single account to ensure lowest costs and reduce the chance of lost or orphan assets. It is worth noting that the benefits of the ‘blind account’ system in Sweden are also due to fee reductions imposed on 2<sup>nd</sup> pillar providers.

# **3.3 Governance and Investment Strategy**

Governance and organizational design is one of the most important elements in delivering good pensions (Clark and Urwin, 2008, Ambachtsheer, 2016). The key issues relate to the legal structure of the pension fund including issues such as the separation between a governing body that focuses on long‐run strategy (including investment strategy) and an (expert) management team that has the freedom to take decisions to implement the strategy. In relation to investment, the full board would be involved in agreeing on the long‐run investment strategy as set out in the Statement of Investment Principles (along with a Statement of Investment beliefs). This will include issues such as the long run objective for the strategy and strategic asset allocation. There will be clear differences between a Defined Benefit and a Defined Contribution pension fund – but perhaps not as much as in the past as techniques like asset‐liability management used in DB funds are seen to help create a more disciplined approach in DC funds so that they focus on their long‐run retirement income function rather than shorter‐term investment returns. For the reader interested in the background to the governance debate, Franzen and Ashcroft (2017) is a useful overview.

There are a very wide range of institutional designs that have been used internationally, particularly in relation to the investment strategy for the member contributions. Options range from control by a public sector body (Norway’s Pension Fund Global for example which is a department of the Ministry of Finance); an arms‐length institution such as a Social Security Agency, Provident Fund or a specific pension delivery body (for example the Kosovo Pension Saving Trust, Malaysia’s Employees Provident Fund or the UK’s National Employment Saving Trust or NEST); private fund managers and employer‐sponsored pension funds with very strict investment regulations (e.g. India’s NPS particularly for the public sector workers in the early years of the system, or Mexico’s AFOREs<sup>8</sup> in the early years when there were very restrictive investment limits and almost 100% allocation to government bonds, or Turkey’s Pension Foundations); and finally private fund managers and employer‐sponsored funds with either no quantitative limits or much looser ones e.g. Chile, Mexico’s AFOREs now with greater latitude in the investment regulations, or India’s NPS now with similarly greater latitude after successive relaxation of the investment limits or most UK, US private providers). The latter category includes countries with ‘prudent person’ style investment regulations which give the governing body broad authority to make decisions on investment allocations.<sup>9</sup>

# **3.3.1 Individual choice of asset allocation**

Sitting alongside these decisions on who decides the investment strategy in general is the issue of whether individual choice is allowed. Some countries have a single strategy for all members (in the same way the NDC formula offers only one option). In other countries there is choice for additional voluntary contributions. Default option with some limited additional choices, or a default strategy with potentially hundreds of choices are also common. In the individual pension market there is often a process whereby a potential client will be taken through options by an adviser who recommends an asset allocation that

> 8 Administradora de Fondos para el Retiro.

> 9 The OECD carries out a useful annual survey of global investment regulations for pension funds.

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