management issues. However, in the case of reserve funds additional safeguards are needed to promote better protection from political manipulation of the funds. Internal and external governance mechanisms and investment controls can be put in place in order to isolate reserve funds effectively from undue political influence.
The following section of the paper will assess whether the GPIF is compliant with some of the key recommendations in the OECD guidance and international good practice.
As the OECD guidelines point out, the governing body of the pension fund is the key body in governance terms. The governing body is the central strategic decision-making organ of a reserve fund. Its main function is approving the investment policy for the fund, and specifically, the strategic asset allocation. The governing body also monitors the executive and operational staff of the fund and is responsible for fulfilling the fund‘s mission and complying with regulations.
Given the critical importance of the governing body, it is understandable that efforts at insulating reserve funds from political risk have focused on it. The role of the governing body is even more important for public pension funds and especially for reserve funds as they are usually the single players in the sector and hence one cannot readily compare them against their national peers, as is often done with private pension funds.9 A strong, qualified board of directors, as far as removed as possible from political influence, is therefore an essential feature of a well-governed reserve fund.
Though the OECD recognize that the governing body of a reserve fund may be a government ministry, the board of the social security institution or the board of an entity established expressly for the purpose of investing the scheme‘s funds, the latter, segregated set-up is preferable as a protection against political interference, especially if a government ministry is responsible for administering the social security scheme. Ideally, reserve funds should be served operationally by an autonomous management entity, dedicated exclusively to the administration and investment of the reserve fund assets. Possible exceptions to this general recommendation are small reserve funds (for which separation may be costly) and funds that by law can only invest in domestic government bonds (for which a separate management entity would not be needed). Even in such cases, however, there should be a department in the government ministry or the social security institution exclusively dedicated to the reserve fund.
Such a segregated governance model of reserve funds (which operates in countries such as Canada, France, Ireland, New Zealand and Sweden) presents some important advantages over the integrated model where the fund is under the direct control of government or the social security institution:10
One can, however, compare reserve funds across countries, as is done in this paper.
One potential drawback of the segregated governance model is that investment management is separated from the actuarial and payments functions of the social security system. On the other hand, as the main goal of