The role of financial markets on successful pension reform

Financing the provision of an adequate pension especially in an aging society is a difficult task. Unsustainable pension plans, imbalances between retirees’ contribution and pension benefits and desire for premature retirement in the previous decades have accelerated the reform from old PAYG pension system with defined benefits to new systems based on individual accounts. In the new systems contributions must be invested in financial markets in order to provide an adequate pension for retirement period. Because of risk transfer from pension funds to the individuals, it could be said that financial markets’ ability in providing continuous return is a precondition for the success of pension reform. This paper reviewing the characteristics and capabilities of financial markets in Iran, investigates the prerequisites of structural pension reform. Using descriptive statistics of deepness in Iran’s financial markets including banks and stock market, this paper shows that savings of pension funds may not be able to obtain a good return for an acceptable level of risk. Iran’s financial markets are not deep enough for the investment of pension funds and, in addition, financial instruments necessary for risk management do not exist. In the previous years,these problems has caused the portfolio of pension funds to be characterized with low return and high risk.