"Pension funds are one of the largest and fastest growing investors in global capital markets. They play a dual role, helping individuals save for old age and reduce the risks they face; while at the same time allocating capital efficiently across firms in order to ensure innovation and growth. Creating a pension system with the right mixture of public and private provision, and regulating this system effectively is essential if these 'new giants' are to play both roles effectively. The authors of this eighth publication in the series of Geneva Reports on the World Economy draw attention to two contrasting scenarios which very effectively illustrate the tension between these two roles. In the first scenario, public pay as you go systems grow, crowding out private retirement savings, while at the same time inflexible labour markets discourage individuals from accumulating human capital and encourage workers to be risk averse.

Since individuals are risk averse, private pension funds seek to reduce risk as well, investing only in low risk government bonds. The result: productive investment by the private sector is crowded out, innovation lags and growth is slow. In the authors' second scenario, high income individuals rely on private pensions, while the public system is designed to provide a basic pension for low earners. The higher income individuals are more willing to bear risk, and so their pension portfolios favour riskier investments, which fosters innovation and growth. Of course neither scenario is inevitable, but the authors stress that without reform of the public pension system, the second, higher growth scenario is unlikely to occur. Yet the reforms to the public pension system outlined in the Report will bring their own set of challenges, precisely because they lead to increased reliance on private pensions.

As the UK's experience reveals, private provision may well lead to high administrative costs and 'misselling.' The Report therefore calls for mandatory participation in pension plans, with limited choice at the individual level, but vigorous competition at the wholesale level, with pension funds obliged to contact out asset management and other services" -- foreword, [xiv]