Financial Sector Assessment a handbook, Chapter 4 Assessing Financial Structure and Financial Development, imf and World Bank, August 2005

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switching, fee structures, and the like can have a large effect on the net return to pension 
investors.
The investment policy of insurance firms, pension funds, and other collective savings 
entities is a key to increasing the availability of term and risk finance to domestic industry. 
This policy can be subject to severe restrictions (such as ceilings on permissible percent-
ages of the portfolio that can be placed in certain broad categories of investment, such as 
property or equities), which must be examined for their appropriateness in the context of 
local capacity. While most of the restrictions are supposedly intended to be prudential in 
nature, in practice some can have the opposite effect, lowering the return on the funds’ 
overall portfolio without reducing volatility. This effect can be especially true with regard 
to requirements to hold government securities and prohibitions on international diversi-
fication.
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Requirements to cede reinsurance to a state-owned reinsurance company have 
similar effects.
The long-term viability of the social security and government employee pension 
schemes needs some examination. Their wider effects on the economy, including the 
effects of compulsory contributions, are generally fiscal matters that are beyond the scope 
of the financial sector assessment. However, it is necessary to be generally aware of those 
wider dimensions if one is to understand the likely evolution of the system. Some exami-
nation of the issues could strengthen the assessment of both the financial structure and 
development.
The health of the insurance and collective investment sectors is often intertwined 
with that of the organized securities markets. Those sectors are the major investors in 
securities, and the level and volatility of asset returns in the sectors depend on the micro-
structure and soundness of securities markets.