Do fundamentals and credibility matter in a funded pension system? A Markov switching analysis for Australia and Iceland

Since the turn of the millennium the problem of credibility of the social security system has spread to the private pension funds sector. This study focus on the Australian and Icelandic experiences to study the credibility of pension fund performance and pension reform. Our credibility indicator is derived from a CAPM time-varying model. We investigate, using the Markov switching model, the linkages between economic fundamentals, the credibility of pension fund investment and the asymmetric effects of the fundamentals in the low and high credibility regimes. We found large differences in the value of the coefficients for all macroeconomic variables. Our findings make a contribution to modelling policy credibility as a non-linear process with two distinct regimes.