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OECD Working Papers on Finance, Insurance and Private Pensions No. 6 - page 10 / 33





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II. The GPIF’s Governance

Good governance is an important issue for any pension fund as it reduces risk 4 and evidence increasingly suggests that it increases investment returns. 5

Governance is even more important for public pension funds - including reserve funds. Ensuring good governance of reserve funds is essential to meet their goal of financing public pension systems. Given the size of reserve funds in many countries, their governance has also major implications for the behaviour of the financial system.

A particular concern in the governance of reserve funds is how to ensure sufficient independence from undue political interference as the government can be tempted to use the funds for other purposes than pension financing. Reserve funds are established by the government, which also selects at least some of the members of the governing body, and may influence its decisions, either directly (through regulations), or indirectly, through political influence on the fund‘s board members and managers.

There is a also a large body of literature underlying the importance of governance for the performance of public pension funds 6 with evidence suggesting that, due to poor governance, the investment performance of public pension funds has been mixed, with many funds obtaining negative real rates of return over an extended period.

How can good governance be ensured? At a minimum, public pension reserve funds should be subject to similar governance and investment management standards as pension funds, following the OECD Guidelines for Pension Fund Governance (OECD 2009)7 and the OECD Guidelines on Pension Fund Asset Management (OECD (2006).8 The OECD effectively address basic governance and investment


In terms of the GPIF, the risk of the fund lies with the ultimate principles or owners of fund - i.e. the Japanese people. This can manifest itself as requirement for higher contributions into Japanese public pension arrangements than anticipated, lower pension payments than anticipated or a combination of the two. Financial risks are not the only ones which the GPIF must control there are also operational risks of managing such a large fund and reputational risk (i.e. the need to maintain public confidence).


See Ambachtsheer (2006).Using pension funds based in Australia, New Zealand, Canada the United States and Europe, the analysis in the paper is based on pension fund executives‘ own opinions of how well their governance is working as a proxy for good governance, with pension fund returns over a passive asset benchmark taken as a performance proxy. The conclusion is that ―the ‗poor-good‘ governance gap, as asserted by pension fund CEO‘s (or equivalents) themselves, has been ‗worth‘ as much as 1-2% additional return per annum‖ – and the authors note that this is likely to be an underestimation.


See Impavido (2002), Impavido and Palacios (2000), and Unseem and Mitchell (2000) The Guidelines can be accessed at http://www.oecd.org/dataoecd/18/52/34799965.pdf



The Guidelines can be accessed at http://www.oecd.org/dataoecd/59/53/36316399.pdf. The OECD governance and investment standards are also fully consistent with the ISSA Guidelines for the Investment of Social Security Funds developed by the International Social Security Association (ISSA 2005), which cover both governance and investment management issues and used the OECD guidelines as a blueprint.


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