By Roland Rupprechter

This paper examines the pension funds of the large industrial countries — with more than USD 68 trillion between them, the heaviest group of investors in the world. It compares how funded retirement provision is organised in the United States, in Japan and in Europe: how state, occupational and private provision differ, who grants which tax advantages to whom and at what level, and why equity quotas diverge so widely across regions — from 25 per cent in Japan and 27 to 29 per cent in the Netherlands, the United Kingdom and Switzerland to 50 per cent in the United States and 52 per cent in Australia. A chapter of its own is devoted to Switzerland: there, companies invest their employees’ pension capital themselves through their own provident institutions, the employer bears at least half of the contributions, and pension assets of more than CHF 1,220 billion reach 152 per cent of economic output — the highest figure in the world. The paper also describes the awarding practice: many funds tender their asset management externally, controlling firms rank the mandates every six or twelve months, and whoever comes last usually loses the mandate a greyhound race that palpably raises investment discipline along the agreed strategy. The paper further shows that states and central banks, too, appear as securities investors — from Japan’s pension reserve fund through the Swiss National Bank, which holds a quarter of its currency reserves in equities, to the Bank of Japan, which will unwind its equity fund holdings only over generations — while states continually replace their maturing bonds with new ones. For private investors, concrete conclusions are derived: employer contributions are the safest return there is and should be exhausted before any other investment; tax-favoured vehicles pay off in almost every situation; the equity share belongs tied to the investment horizon — high in youth, declining by plan towards retirement; and the most important institutional virtue, the regular verifiable review of one’s own investments against a written strategy, costs nothing.

Source SSRN