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OECD Develops New Standards For Oversight Of Pension Fund

OECD press release

March 23, 2006

The OECD has developed a new set of international standards, endorsed by all 30-member governments, for the oversight of pension funds to ensure good management and transparency. The new rules call on regulators to give pension funds more flexibility in their investment choices and demand trustees to be more diligent in monitoring their fund's investments. See below.

OECD press release

March 23, 2006

As more and more people invest in private pensions, funds must be managed well and transparently. New OECD guidelines on pension fund asset management aim to meet this need.

The guidelines mark an initiative by OECD countries to set international standards for the oversight and day-to-day management of pension fund investments. They simultaneously call on regulators to give pension funds more flexibility in their investment choices and on trustees to be more diligent in monitoring their fund's investments.

More than one million pension funds operate in OECD countries, holding more than USD 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.

Pension fund investment strategies are becoming more sophisticated too, but differences remain between countries in the way pension fund investments are managed and regulated. For example, there are substantial differences between countries in the extent to which company sponsored pension funds are authorised to invest in the equity of the sponsoring company.

The OECD guidelines, endorsed by all 30 member governments, offer a roadmap for how pension funds should manage their assets. They propose that funds follow the so-called prudent person rule and hence:

- Define an overall investment policy and actively follow it

- Require the 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

- Identify and measure the risks to which the fund is exposed and put in place mechanisms to monitor and manage those risks

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. This will give trustees early warning of a fund's underperformance and enable them to take quick corrective action.

Legal provisions should not prescribe a minimum level of investment for any given category of investment, nor prohibit investment abroad by pension funds. Furthermore, portfolio limits should be set only in specific instances, for example, to limit investment in the securities of an individual company or in shares of a fund's sponsoring employer and/or its asset manager.