Governance of Brazilian Pension Funds

This paper analyzes theoretically and empirically the governance of pension funds in Brazil. It first demonstrates that the law allows sponsors (employers) to write contracts (by-laws) governing the relationships between the sponsors, the managers and the participants (employees) of the pension funds. It also explains that, from an agency theory perspective, this legal framework favors non-optimal governance structures, since sponsors do not bear the financial consequences of the contracts they create. As predicted, the empirical evidence reported in this thesis shows that sponsors use this authority to create contracts that minimize monitoring and maximize control over business decisions to the greatest extent permitted by law. For instance, the findings show that, in writing the by-laws of pension funds, sponsors reduce the functions of management bodies in which participants have seats. Moreover, there is evidence that the by-laws contain extra requirements for the members of administrative bodies in order to ensure that the individuals elected to these bodies have a contractual or fiduciary relationship with the sponsor, and therefore, are within the sponsor’s sphere of influence. The paper concludes by identifying some of the areas in which empirical assessment is necessary for the recommendation of reforms in the complementary social security system in Brazil