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mandatory defined contribution pensions
of a performance benchmark for the board and the creation of outside options for the board’s suppliers.33 Pension firms in the quasi-market segment are the only adequate benchmark for evaluating the public procurement board. Such a well-tuned benchmark allows the political authorities and public opinion to better assess the performance of the public procurement board. By contrast, the absence of adequate peers for benchmarking in a pure procurement model impairs the ability of the public board to evaluate the quality of asset management. The existence of a pension quasi-market with multiple providers improves the outside options for suppliers to the public procurement board. Underinvestment by suppliers in financial innovation and adaptation is therefore reduced relative to the pure procurement model. This reduction helps the procured segment attain returns as high as in the quasi-market. A hybrid can also be superior to a pure quasi-market for other reasons. For instance, the welfare of undecided consumers increases when their choices are replaced by a technically qualified public board that compares prices while controlling asset management quality. In addition, if the allocation to the procured segment is reasonably targeted to inert participants, the share of active participants in the quasi-market segment increases. This increase raises the demand elasticity faced by firms in the quasi-market segment, which could result in lower prices and fewer marketing expenditures in that market. Finally, the “signaling effect� of establishing a procured segment may further increase public awareness about price differences among participants, thereby further raising price elasticity. For example, in Mexico, the allocation of the undecided led the press to intensify information on prices every time a new group of participants was assigned, which happened quarterly until December 2008.34 Policy considerations for well-functioning hybrid systems. The design of a well-functioning hybrid model needs to take into account several policy considerations, among which the following five appear critical. First, a participant should not be allocated to a segment that does not maximize his or her expected future wealth, net of fees. The government should allocate participants to the procured segment only when it is arguably in their best interests. Given the volatility of equity returns and the direct effect of returns on pensions in a DC system, a government may face suits from individuals who find ex post that the government allocation materially reduced their pensions, even though this outcome could not be predicted ex ante. Thus, the allocation to the procured segment needs to be transparent and well reasoned, and individuals should be free to leave the procured choice if they consider it worse than the choices available in the quasi-market. Second, the default allocation should be targeted to inert participants on the basis of objective rules. Involving the government in the business