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OECD Working Papers on Finance, Insurance and Private Pensions No. 6 - page 14 / 33





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one way of isolating the funds from political pressure. On the other hand, the larger reserve funds (e.g. Norway, Canada) have the scale to build up significant in-house operations. Given the scale and high profile nature of the GPIF, it would be possible to set up a world class fund management operation in- house (taking away possible agency issues, oversight and control risks, or even potential corruption risks in dealing with outside fund managers). The GPIF employs 10 trust banks and 30 investment advisors to manage 70% of assets externally which seems a large number for what is in principle a simple, largely passive investment strategy. Agency risks, cost control, operational risk and reputational risk may all be increased by this structure.

b) Membership+ Selection

As the ultimate authority with responsibility for the management of the reserve fund, the composition and functioning of the governing body are the first and main determinant of the fund‘s performance. An experienced, well-functioning board will ensure that proper monitoring, incentive and control mechanisms are put into place to achieve the fund‘s objectives.

The OECD governance guidelines note that the membership of the governing body of a pension fund should be subject to minimum suitability (or non-suitability) standards in order to ensure a high level of integrity, competence, expertise and professionalism in the governance of the pension fund. Furthermore, the governing body should collectively have the necessary skills and knowledge to oversee all the functions performed by a pension fund, and to monitor those delegates and advisors to who such functions have been delegated. While it may not be necessary for all board members to be experts in finance, the board must collectively possess the necessary skills to carry out is oversight function effectively.

Special care needs to be taken with the selection and appointment of the board of reserve funds, given the potential for political interference and the appointment of directors to serve largely as representatives of specific stakeholders.12 The role of independent directors appears to be even more needed than in private pension funds.

The size of the board is also important. Though it should reflect the nature and scope of the organization, if too large, efficient decision making can be impeded.

Board members should be appointed following a transparent selection and nomination process. While the government often appoints directors to represent non-government interests, it is likely that the influence that the government has on their nomination process seriously limits the ability of the appointed directors to independently execute their functions. One way to reduce the direct influence of government in the appointment of directors and reduce the scope for cronyism is to establish a nominating committee of experts (selected by the government) who in turn nominate the directors of the reserve fund following a transparent recruitment process. This appointment structure is followed by the Canadian and New Zealand reserve funds.


Social security institutions usually have tripartite representation in their governing body (governments, employers and employees).


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