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OECD Working Papers on Finance, Insurance and Private Pensions No. 6 - page 19 / 33





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  • Risk-management systems: 13 risk-based (i.e. proportional) risk-management systems should be in place at reserve funds including adequate control systems, IT, monitoring and external controls, as well as internal oversight mechanisms (separation of duties, checking etc.). According to the OECD guidelines for pension fund governance (again, in common with the ISSA guidelines), reserve funds should have appropriate control, communication and incentive mechanisms that encourage good decision-making, proper and timely execution.

  • Codes of conduct and conflicts of interest: control systems should include a code of conduct and mechanisms to addresses conflict of interest situations (e.g. tight controls on members own investments, including having to report any attempted political interference in investment decisions). A code of conduct for directors, guidelines on conflicts of interest and clearly defined fiduciary duties need developing as either separate plan documents or merged in a comprehensive governance manual. A governance committee could be used to monitor the application of the code of conduct and conflicts of interest guidelines and conduct periodical governance assessments.

  • Disclosure: transparency and regular review and assessment are essential parts of good governance. This is particularly important for reserve funds which may have a large impact on capital markets and the financial system, and as they do not have clear benchmarks versus which to be judged. Reserve funds should also be required to disclose publicly relevant information and should have procedures in place to address complaints from the general public. The likelihood of mismanagement or undue influence can be drastically reduced if the public is regularly informed about issues such as the governance structure, the financial situation and the performance of the governance framework as well as the financial performance of the fund.

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      A sound statement of investment policies should be produced and at the same time there should be a transparent process for disclosing to the public how the investment policy is being implemented and adhered to.14

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    Standardised valuation methods, following international best practices (such as the CFA Global Investment Performance Standards) are also necessary also allow these reserve funds to compare their performance against relevant market benchmarks and against their own target return. In addition to valuing assets at market prices, it is


For details see (Stewart 2010). See also OECD/ IOPS Good Practices for Pension Funds’ Risk Management Systems (OECD 2010 - forthcoming)


The investment policy document should clearly express the desired asset mix necessary to match assets and liabilities. It could also describe the role and composition of the investment committee, how investments are recorded, both short and long-term performance measures, the universe of vehicles which can be used to meet these measures, risk tolerance and guidelines and the reporting, compliance structures and performance reviews. Above all long-term performance measures should be consistent with the long-term target funding ratio of the plan.


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