Blogging Employee Benefits

March 24, 2006

OECD Guidelines for Pension Fund Asset Management

Filed under: Investment — Fuguerre @ 5:51 am

The Organization for Economic Co-operation and Development has published OECD Guidelines for Pension Fund Asset Management. Prepared by the organization’s Insurance and Private Pensions Committee and Working Party on Private Pensions, the guidelines mark an initiative by the world’s economic leaders to set international standards for pension fund investment management and oversight, complementing the OECD Council’s 2004 Core Principles of Occupational Pension Regulation. [OECD Website Release]

Endorsed by all 30 member governments, including the U.S., the guidelines enunciate best practices for pension fund investment regulation, centered on the basic premise that the regulatory framework should reflect the retirement income objective of the pension fund —

  • Valuation of Pension Assets – Legal requirements should establish a transparent basis for valuing pension fund assets. [5.1] If market valuation is not required, then market values should be disclosed. [5.2] Where valuation methodologies differ for different purposes – such as accounting versus funding – the differences should be transparent. Smoothing methods are permissible for actuarial and funding purposes. [5.3]
  • Quantitative Portfolio Limits – Maximum levels of investment allocation for particular investment categories may be prescribed to the extent consistent with prudential principles of security, profitability, and liquidity. Minimum levels should not be prescribed, except under exceptional temporary circumstances. [4.1] Where ceilings are required, a procedure for correcting excesses within specified time limits should be established. [4.3] Self-investment and investment in assets of the plan sponsor should be prohibited or strictly limited. [4.4] Foreign investments should not be prohibited. [4.6] Pension investment law should address the use of derivitives, in particular prohibiting or strictly limiting exposure to unlimited commitments. [4.7]

The OECD guidelines further encourage core principles for pension investment fund managers –

  • Prudent Person Standard – Pension trustees should be subject to fiduciary standards, making investment decisions in the best interests of plan members and beneficiaries. [2.2] When the pension trustees lack sufficient expertise to fulfill investment responsibilities, the external assistance of an expert should be sought. [2.1]
  • Identification of Investment Managers – Parties responsible for fund investment should be identified. If external investment managers are involved, an investment management agreement should be required. [3.6]
  • Investment Policy – A pension fund should actively adhere to a written statement of investment policy [3.1, 2.3] that establishes clear investment objectives consistent with the retirement income objective of the fund. [3.2] At a minimum, the investment policy should identify the fund’s strategic allocation strategy, overall performance objectives, and monitoring methods. [3.3]
  • Internal Controls – Criteria and procedures should be established for periodic review of the effectiveness of the fund’s investment policy. [3.7]
  • Risk Management – Sound risk management concepts, such as diversification and asset-liability matching, should be established. [3.4]
  • Participant Direction – Funds that permit individual investment selection should include an appropriate array of investment options, including a default option, and should ensure that participants have access to the information necessary to make sound investment decisions. [3.5]

OECD member countries are encouraged to disseminate the guidelines among pension funds and to invite their public authorities to ensure adequate regulation consistent with the recommended framework.

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