Pension Reforms and Incentives to Domestic Capital Markets: A Global Study

Abstract

Personal individual capitalization systems have experienced significant growth in recent decades, following the trend of aging populations and defined benefit pension crisis. This article investigates whether the implementation of funded pension schemes globally has prompted the development of domestic capital markets worldwide, considering 31 pension funds over the period of 1990-2011. The methodological strategy relies upon panel data regressions applied to depth and liquidity indicators of stock and bond markets. The analysis has revealed that individual capitalization pension funds have meant a stimulus to stock market depth. A negative causality with stock market liquidity is also evidenced, which is linked to the long-term profile of pension portfolio management, which privileges funding strategies on trading strategies. Given the structural diversity of pension systems studied, the article uses clustering classification tools for segmenting the population according to the importance of pension funds in the economy. This analysis shows that there are homogeneous groups whose members have similar age of the systems, but not a geographical proximity or type of system structure. It is found that the attribute of belonging to a cluster determines significant impacts of pension systems in relation to indicators of capital market development. Stock markets depth and liquidity indicators receive the positive impacts of greater magnitude from the systems included in the advanced maturation cluster. Pension funds belonging to the low gradual and incipient maturation cluster exert significant impacts on public bond markets depth. These findings are consistent with existing literature and with the investment portfolio, that usually characterizes pension funds in their earlier stages of life.