The Rationale for Regulation

The answer to the question “Why regulate employer-provided pensions?” may seem obvious. Nonetheless, a review of the rationale for regulating employer-provided pensions sheds light on why regulatory frameworks can differ from one country to another, and can also lead to a benchmark for evaluating certain features of a country's regulatory apparatus.

The most basic reason for regulating an employer-provided pension, especially a traditional pension, is that it is so complex a social and economic institution that laissez-faire, or self-regulation, will not be feasible. Too much can go wrong. A traditional pension plan channels a large share of the saving of working men and women into investments in order to pay a pension to the workers when they retire, which may represent a significant proportion of their income in retirement. The malfunctioning of a pension plan can jeopardize the welfare of many workers, and its complexity increases the chances of malfunction. Defined-contribution plans are less complex for the sponsor than defined-benefit plans, but they face their own risks. The possibility that defined-contribution plans will not perform as they should to provide a secure retirement is just as great as it is with traditional plans, perhaps even greater. A traditional pension plan's complexity derives from its long planning horizon and the sophisticated investment strategy that such a horizon demands, but also owes something to the rules the plan applies to determine eligibility for and the value of the benefits it pays.