New Research: Neutralizing Unprincipled Political Interference

Ashby Monk

Gordon and I have just finished a draft paper on the design and governance of pension reserve funds that specifically focuses on principles and practices for managing unprincipled political interference and bureaucratic encroachment.

As you are no doubt aware, some countries (e.g., Australia, Canada, Ireland, and New Zealand) have sought to pre-fund their public pension and social security commitments through PRFs; in doing so, the governments hope to minimize the fiscal stress that population aging will inevitably place on already scarce budgets by bolstering returns on pension assets through financial investments.

Other countries, however, have avoided PRFs due to fears of politicization. For example, the idea of a PRF was widely debated in the United States when the Clinton Administration considered mobilizing the assets of the Social Security Trust Fund in the 1990s. At the time, leading economists, including Alan Greesnpan, raised doubts about whether such an institution could be protected from politicization. And, ultimately, the idea of a new American SWF for pensions was torpedoed.

Still, Australia, Canada, Ireland, New Zealand and others have all gone down the path of prefunding. And, to be sure, these countries weren’t any less worried about the issue of politics than their peers in the United States. In fact, all four countries gave considerable thought as to how they could design and govern an institution that would neutralize short-term political interest. As such, these four institutions provide important lessons for the design of government-sponsored investment institutions.

Drawing on these four case studies, our paper considers the issue of organizational design, institutional governance and the management of pension reserve funds, especially as they relate to unprincipled political intrusions. In doing so, we identify principles and policies of practice consistent with sustaining the integrity of these funds in terms of realizing their initial mandates and the longer-term commitments made by governments when setting their goals.

We hope you find the paper interesting. Your comments and criticisms are welcome!

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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