The term pension regulation refers to laws that exist in many countries specifically designed to protect the retirement assets of members of the public. Laws are in place that limit the ability of investment firms to take undue risks with retirement funds. Individuals and companies can face severe penalties for failing to comply with pension regulations. Aside from protecting the assets of individuals, pension related laws also reduce the likelihood that retirees will lose their savings and become dependent on government provided benefits.
Pension regulations in most countries prevent investment firms from co-mingling retirement assets with other types of accounts. Generally, pension money must be kept separate from the investment firm’s own assets, and this means pension plan participants are not exposed to risks stemming from the investment firm going bankrupt. The separation of pension money and general company funds also removes any incentive for the investment firm to take undue risk with retirement money because an investment firm does not stand to directly benefit from any growth in the retirement account.
Brokers and investment sales representatives must comply with pension regulation rules pertaining to investment recommendations. Sales representatives can face fines and lose their licenses for making inappropriate investment fund recommendations to clients in order to increase personal sales commissions. Investment firms must keep records pertaining to the rationale behind investment elections made with pension funds.
In most countries, pension regulations require investment companies to publish quarterly and annual results detailing the performance of pension funds. Plan participants must be provided with a copy of the results and a statement containing details of their own accounts. Statements must include details of all the fees that were assessed on the account. In many instances, pension regulation rules limit the amount that pension custodians can charge participants on an annual basis.
Pension regulation laws also place limits on the kinds of securities that investment companies can hold within pension funds. Typically, investment firms cannot use pension funds to buy illiquid kinds of securities that cannot be easily sold. Investment companies must be mindful of tax regulations and cannot buy securities that would cause negative tax ramifications for plan participants.
Some governments provide guarantees that protect pension plan participants from losses stemming from fraud committed by individuals working for pension companies. In many countries, most types of pension funds are insured to some extent by the national government. Government guarantees do not protect plan participants from losses caused by the securities in the pension plan losing value, but do protect investors against fraud.