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services, such as supervision, can be "imported" if investment management services are contracted to foreign firms.

10. _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 on the exact type ofpension reform proposed and not only upon permitting international competition._ For example, it may not be advisable, or may even be damaging in poor small countries, to have a "three pillar approach," as advocated in a recent World Bank study (1994), which can involve a-pay-as-you-go first pillar, a mandatory definedcontribution 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**

11. 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 government. Among the most important findings in this area are:

- (a) _There is a need to ensure a reduction of concentration in the trustee function by considering the mandated unbundling of some pension services such as collection and payment services, while permitting 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 the number of trustees; how they are selected; and the supervisory, regulatory, and governance environment in which they operate._ The limited number of independent interests in some small developing countries demands that the number of trustees be at least six and that coordination among trustees be prohibited unless foreign investments are very large. In addition, this report shows that in small countries where human capital is scarce it may be best to permit individual members of pension funds to choose the pension management trustee and board of directors, as opposed to having trustees selected by the government or by employers and unions. The latter alternatives are shown to be fraught with problems in small countries. Such a recommendation presumes that regulations and supervision systems are put in place to ensure that the pension fund trustees have incentives to carry out their fiduciary responsibilities on behalf of fund members.

- (c) _Providers of pension services need the flexibility to subcontract domestically or internationally for many pension services._ This should include subcontracting for data gathering, to permit the small country to acquire pension services at lowest