Oecd guidelines on pension fund asset management

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PDF Oecd Guidelines for Pension Fund Governance

DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
OECD GUIDELINES ON PENSION FUND ASSET MANAGEMENT
Recommendation of the Council
These guidelines, prepared by the OECD Insurance and Private Pensions Committee and
Working Party on Private Pensions, were adopted by the OECD Council on 26 January 2006.
1. Pension funds are one of the most important players in the financial markets of the OECD
countries, managing more than $15 trillion of assets in 2003, which represents over 80 percent of the
OECD's area GDP. Pension funds also play a key social role in channelling retirement contributions to
finance retirement benefits. The investment of pension assets is one of the core functions performed by
private pension arrangements. In order to promote both the performance and the financial security of
pension plan benefits, it is critical that this function is implemented and managed responsibly.
Policymakers have therefore a key role to ensure that regulations encourage prudent management of
pension fund assets so as to meet the retirement income objectives of the pension plan.
2. The investment function varies depending on the type of pension plan. In the case of defined
benefit plans, the goal of the investment function is to generate the highest possible returns consistent with
the liabilities and liquidity needs of the pension plan, and in light of the risk tolerances of affected parties.
In a defined contribution plan, the main goal of the investment function is to generate gains that accrue to
individual member account balances in light of her investment goals.
3. The OECD Guidelines on Pension Fund Asset Management set out a basic framework for the
regulation of pension fund investment, where regulation is defined in a broad sense that may include: the
main body of the pension law; related laws (e.g. trust law); tax requirements; standards set by pension and
financial sector supervisory authorities; codes of conduct developed by professional associations (e.g. a
pension fund association); collectively bargained agreements; or plan documents (e.g. trust documents).
4. The Guidelines start with the basic premise that the regulatory framework should take into
account the retirement income objective of a pension fund. 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. On the other hand, limits on investment in assets belonging to the plan sponsor are
recommended by the OECD Guidelines.
5. The Guidelines on Pension Fund Asset Management, which are contained in Annex I to the draft
Council Recommendation, address regulatory concerns that arise in the management of pension fund
assets. The Guidelines aim to guide policymakers, regulators, supervisors and other entities involved in
pension fund administration and management, particularly pension fund asset management. They are non-
binding and aim to present good practices. As noted in various annotations to the Guidelines, their precise
manner of implementation may vary from country to country, the aim being that the underlying objectives
of each Guideline are met.
6. These Guidelines apply to the regulation of the individuals or entities responsible for managing
the pension fund assets, typically the governing body of the pension fund, but also the asset management
companies associated with them. Like previously developed principles and guidelines, these guidelines are
intended to apply to occupational, private pension plans, that is, to those whose membership depends on an
employment relationship - regardless of whether the plans are voluntary or mandatory (on the part of
employers or employees) and regardless of whether the plans serve as the primary or supplementary means
of providing retirement income1. Non-occupational plans and funds are not specifically addressed by these
guidelines. Nonetheless, given the nature of the particular topic addressed - pension fund asset
management - most of the guidance may be also applied to non-occupational pension programmes that are
1 In EU countries, these Guidelines may not apply to those occupational, private pension plans which fall
outside the scope of the directive 2003/41/EC of the European Parliament and of the Council of 3 June
2003 on the Activities and Supervision of Institutions for Occupational Retirement Provision.
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supported by privately managed pension funds. Similarly, administrators of government worker's pension
programmes, to the extent funded, may also find these guidelines valuable.
7. These Guidelines were developed by the Working Party on Private Pensions and the Insurance
and Private Pensions Committee. They complement the "Recommendation of the Council on Core
Principles of Occupational Pension Regulation", adopted by the OECD Council in July 2004.
8. The annotations in Annex II explain the rationale for the Guidelines and provide additional
information on certain issues. Annex II is not formally part of the draft Recommendation and may be
updated or amended as necessary by the Insurance and Private Pensions Committee.
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APPENDIX
Recommendation on Guidelines on pension fund asset management
THE COUNCIL,
Having regard to Articles 1, 3 and 5(b) of the Convention on the Organisation for Economic
Cooperation and Development of 14 December 1960;
Having regard to the Recommendation of the Council on Core Principles of Occupational Pension
Regulation, to which this Recommendation is complementary;
Considering that the investment of pension funds is a central function of private pension
arrangements;
Considering that regulations should encourage prudent management of pension fund assets so as to
meet the retirement income objectives of the pension plan;
Considering that the Guidelines presented in Annex I are based on previous work carried out in this
area by the Insurance and Private Pensions Committee and its Working Party on Private Pensions;
Considering that the Guidelines address regulatory concerns that arise in pension fund asset
management;
Noting that these Guidelines are intended to apply to occupational, private pension plans and the
pension funds and asset management companies associated with them;
Noting that these Guidelines may also apply to funded, non-occupational plans and funds;
Noting that the Guidelines identify good practices for the regulation of pension funds, where
"regulation" is understood to include a broad variety of instruments, e.g. laws; tax requirements; standards
set by supervisory authorities; codes of conduct developed by professional associations; collectively
bargained agreements and plan documents;
Recognising that evolutions of the pension funds structure or functioning may call for further
updating and adaptation of these Guidelines;
On the proposal of the Insurance and Private Pensions Committee and its Working Party on Private
Pensions;
I. RECOMMENDS that Member Countries invite public authorities to ensure an adequate regulation
of pension fund asset management, having regard to the contents of Annex I to this Recommendation, of
which it forms an integral part.
II. INVITES Member Countries to disseminate these Guidelines among pension funds, noting also the
annotations provided in Annex II, as from time to time amended.
III. INVITES non-Members to take account of the terms of this Recommendation and, if appropriate,
to adhere to it under conditions to be determined by the Insurance and Private Pensions Committee.
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IV. INSTRUCTS the Insurance and Private Pensions Committee and its Working Party on Private
Pensions to exchange information on progress and experiences with respect to the implementation of this
Recommendation, to review that information and to report to the Council not later than three years
following its adoption and, as appropriate, thereafter.
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ANNEX I
GUIDELINES ON PENSION FUND ASSET MANAGEMENT
1. Retirement income objective and prudential principles
1.1 The regulation of pension fund asset management should be based on the basic retirement income
objective of a pension fund and assure that the investment management function is undertaken in
accordance with the prudential principles of security, profitability, and liquidity using risk management
concepts such as diversification and asset-liability matching.
2. Prudent person standard
2.1 The governing body of the pension plan or fund and other appropriate parties should be subject to
a "prudent person standard" such that the investment of pension assets is undertaken with care, the skill of
an expert, prudence and due diligence. Where they lack sufficient expertise to make fully informed
decisions and fulfil their responsibilities the governing body and other appropriate parties should be
required to seek the external assistance of an expert.
2.2 The governing body of the pension plan or fund and other appropriate parties should be subject to
a fiduciary duty to the pension plan or fund and its members and beneficiaries. This duty requires the
governing body and other appropriate parties to act in the best interest of plan members and beneficiaries
in matters regarding the investment of pension plan assets and to exercise "due diligence" in the
investment process.
2.3 The legal provisions1 should require the governing body of the pension plan or fund to establish a
rigorous process by which investment activities are carried out (see Guideline III on investment policy),
including the establishment of appropriate internal controls and procedures to effectively implement and
monitor the investment management process.
3. Investment policy
3.1 The governing body of the pension fund should set forth in a written statement and actively
observe an overall investment policy.
3.2 The investment policy should establish clear investment objectives for the pension fund that are
consistent with the retirement income objective of the pension fund and, therefore, with the characteristics
of the liabilities of the pension fund and with the acceptable degree of risk for the pension fund, the plan
sponsor and the plan members and beneficiaries. The approach for achieving those objectives should
1 Throughout this document, legal provisions are defined in a broad sense. They may include the main body
of the pension law, related laws (e.g. trust law), tax requirements, standards set by pension and financial
sector supervisory authorities, codes of conduct developed by professional associations (e.g. a pension fund
association), collectively bargained agreements, or plan documents (e.g. trust documents).
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