Monetary and Banking Research Institution
Date:10/17/2018 3:37:26 PM   |   Code : 293889
A policy paper on “The Role and Effects of Pension Funds on Financial Stability in Iran;The Necessity of a Macro-Prudential Authority
A policy paper on “The Role and Effects of Pension Funds on Financial Stability in Iran;The Necessity of a Macro-Prudential Authority" has been published by the Monetary and Banking Research Institute (MBRI)

 

Pension funds play an important role in financial intermediation in most of the countries around the world. They provide means of saving for individuals to accumulate funds over their working lives to be able to meet their retirement spending needs by provision of an annuity. Pension funds collect these funds and supply them to end-users such as corporations, households or governments for investment or consumption. Since early withdrawal of funds is usually restricted or forbidden, pension funds have long term liabilities, allowing holding of high risk and high return investments. Accordingly, these funds are intermediated into a variety of financial assets, which include corporate equities, government bonds, real estate, corporate debt (in the form of loans or bonds), foreign exchange and deposits as forms of liquidity.

In this article, authors have studied the structure of pension funds in Iran in terms of their size, interconnectedness with other parts of financial system and their substitutability.

This study shows that two of about 20 pension funds in Iran, Social Security Organization (Tamin Ejtemaii) and The Civil Servants Pension Organization (Sandogh Bazneshastegi Keshvari)), are too big to fail. More than 47 million of Iranians are covered by these two funds. They are also too interconnected with other parts of the financial system which makes the financial problem of pension funds transmits through their companies to all parts of the financial system and becomes a systemic risk. 

Long maturity periods, relaxed regulation compared to other financial intermediaries and ageing population of Iran coupled with increasing life expectancy have caused pension funds to have a lot of financial difficulties and this can be a starting point for financial instability in the whole financial system.

To protect the financial system against risks, authors suggest macro and micro prudential policies. They suggest that a Financial Stability Council comprised of Money and Credit Council, Securities and Exchange Council, The Supreme Council of Urban Planning and Architecture and The High Council of Insurance and Retirement Services to be established. This Financial Stability Council will be a supreme policy making body for macro prudential policies. The High Council of Insurance and Retirement Services comprised of President of Central Insurance of Iran, Vice Ministers of "Economic Affairs and Finance", "Cooperatives, Labor and Social Welfare", "Industry, Mine, and Trade", and "Agriculture", Managing Director of Social Security Organization, Chairman of The Civil Servants Pension Organization together with five authorities and senior experts from the insurance market and the deputies of the this High Council, will manage micro prudential policies in insurance and pension funds sector.

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