Local Investment Rules for Aruban Pension Fund: A Simulation of Welfare Effects for Pension Participants
Wojahn, Oliver van Spaendonck, Jorrit
Wojahn, Oliver
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Keyword
Pension funds
Capital controls
Localization requirements
Macroprudential
Capital controls
Localization requirements
Macroprudential
Location research
Aruba
Date
2019
Language
en
ISSN
0037-7651
ISBN
Research Projects
Organizational Units
Journal Issue
Abstract
Pension funds in Aruba are required to invest at least 60% of their assets domestically. While this kind of localization requirement is common in many countries , the Aruban case is special because the economy is very small, both in absolute terms and even more so in relation to pension assets. Furthermore , the Aruban economy is almost exclusively dependent on tourism from the United States and Venezuela. These factors severely limit the opportunities to diversify risks domestically. Using a Monte Carlo simulation , we find welfare losses of up to USD 48,575 for moderately risk averse participants contributing for forty years into the mandatory pension scheme. The substantial losses suggest that pension
funds should make better use of the flexibility allowed under the current regulatory regime and ramp up foreign holdings towards the statutory limit. Moreover, the Central Bank of Aruba should carefully weigh the benefits of the localization requirements, i.e. the support of the currency peg and local investment, against the welfare losses of pension participants.
Citation
Wojahn, O., & van Spaendonck, J. (2019). Local Investment Rules for Aruban Pension Fund: A Simulation of Welfare Effects for Pension Participants. Social and Economic Studies, 68(1/2), 147–168.
Sponsorship
Publisher
University of the West Indies
Journal
Social and Economic Studies
Target group
URI
https://hdl.handle.net/20.500.14473/1121