A news release from the Organization for Economic Cooperation and Development (OECD) said the new document is an effort to settle on international pension management oversight standards as regulators in the various countries give pension funds more investment flexibility.
According to the organization, more than one million
pension funds operate in OECD countries, holding more than
$16 trillion in assets at the end of 2005. In many
countries, pension funds are already a central piece in the
retirement income system and the trend towards
complementing traditional social security schemes with
private ones is set to rise, the statement said.
One problem, according to the OECD, is that differences remain between countries in the way pension fund investments are managed and regulated. For example, there are “substantial” differences between countries in how much employer pensions can invest in company stock shares.
The OECD guidelines, endorsed by all 30 member governments (including the US, UK, and the European Union), propose that funds follow the ‘prudent person’ rule and:
- define an overall investment policy and actively follow it,
- require the fund’s governing body to act in the “best interest” of beneficiaries when investing pension plan assets,
- establish internal controls and procedures to effectively implement and monitor the way investments are managed, and
- identify and measure the risks to which the fund is exposed and put in place mechanisms to monitor and manage those risks.
Specifically, to give trustees a clear picture of how
the pension fund is performing, the market value of the
fund’s assets and liabilities should be disclosed on a
regular basis, the group asserted. This will give trustees
early warning of a fund’s underperformance and enable them
to take quick corrective action.
OECD argued that legal provisions should not prescribe a minimum level of investment for any investment category, nor prohibit investment abroad by pension funds. Furthermore, portfolio limits should be set only in specific instances such as limiting investment in the securities of an individual company or in shares of a fund’s sponsoring employer and/or its asset manager, the OECD said.
” The Guidelines start with the basic premise that the regulatory framework should take intoaccount the retirement income objective of a pension fund,” the OCED wrote. “Two other essential aspects of the regulatory framework are the prudent person standard and the statement of investment policy. Regulations may also include quantitative limits, but only as long as they are consistent with and promote the prudential principles of security, profitability and liquidity pursuant to which assets should be invested. Minimum levels of investment on certain assets, for example, would not be considered consistent with these principles.”
The text of the OECD guidelines are