Pension regulations protect public pension funds by limiting investment firms’ risk-taking, separating pension funds from other accounts, and requiring compliance with investment recommendations and reporting. They also limit securities types and provide government guarantees against fraud.
The term pension regulation refers to laws that exist in many countries specifically designed to protect the pension funds of members of the public. Laws are in place that limit the ability of investment firms to take undue risk with pension funds. Individuals and businesses can face severe penalties for failing to comply with pension regulations. In addition to protecting individuals’ assets, pension laws also reduce the likelihood that retirees will lose their savings and become dependent on government-provided benefits.
Pension regulations in most countries prevent investment firms from mixing pension funds with other types of accounts. In general, retirement money should be kept separate from the investment firm’s assets, which means that pension plan participants are not exposed to the risks arising from the failure of the investment firm. The separation between pension funds and general corporate funds also removes any incentive for the investment firm to take undue risk with pension funds because an investment firm is unable to directly benefit from any increases in the pension account.
Investment brokers and sales representatives must comply with pension regulatory rules relating to investment recommendations. Sales representatives can face fines and lose licenses for providing clients with inappropriate investment fund recommendations in order to raise personal sales commissions. Investment firms must keep records relating to the rationale behind investment elections made with pension funds.
In most countries, pension regulations require investment firms to publish quarterly and annual results detailing the performance of pension funds. Plan participants must be provided with a copy of the results and a statement containing details of their accounts. Statements must include details of any fees that have been assessed to the account. In many cases, pension regulatory rules limit the amount that pension custodians can charge participants on an annual basis.
Pension regulation laws also place limits on the types of securities investment firms can hold within pension funds. Typically, investment firms cannot use pension funds to buy illiquid types of securities that cannot be easily sold. Investment firms must be aware of tax regulations and cannot purchase securities that could cause adverse tax consequences for plan participants.
Some governments provide guarantees that protect pension plan participants from losses resulting from fraud committed by individuals working for pension companies. In many countries, most types of pension funds are insured to some extent by the national government. Government guarantees do not protect plan participants from losses caused by the loss in value of securities in the pension plan, but they do protect investors from fraud.
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