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OECD secretariat

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Disclosure: trustees to members and auditors & actuaries to OPRA ... MDR) and disclosure requirements (SIP, actuary and auditor certification) ... – PowerPoint PPT presentation

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Title: OECD secretariat


1

Investment Regulation of Pension Funds in OECD
countries
  • Juan Yermo
  • OECD Administrator

2
The OECD study on Investment regulation
  • What is the role of investment regulation?
  • conflicts of interest (fraud, X-inefficiency) -
    investors as principals
  • moral hazard of government guarantees
  • specific government objectives (debt financing,
    social investing, corporate governance,
    macrostability, savings)
  • What side-effects can investment regulations
    have?
  • Diversification and performance
  • Capital market imperfections
  • What determines asset allocation and performance
  • Regulations (governance, funding, investment,
    performance, etc)
  • Type of plan and individual choice
  • Pension fund liabilities (maturity)
  • Local savings and investment culture
  • Macroeconomic performance

3
Two main approaches to Investment Regulation
  • Regulation of investment decisions
  • traditional quantitative portfolio approach
  • different types
  • list of admissible assets
  • minimum diversification requirements
  • global asset allocation limits (by liquidity,
    credit risk, asset class)
  • ownership concentration limits
  • Regulation of investment decision-making
  • prudent person approach
  • governing structure and representation
  • fit-and-proper requirements
  • responsibilities - duty of prudence, SIP,
    disclosure
  • member rights - information, representation,
    portability, and litigation
  • legal implementation
  • common law
  • civil law

4
Quantitative Rules in the OECD
  • Used in most OECD countries to
  • limit self-investment (all between 0 and 30)
  • ensure minimum diversification (single
    security/issuer)
  • limit investment in property
  • Used in some OECD countries to
  • limit investment in equities and other higher
    risk assets
  • limit investment in foreign securities (non-OECD)
  • prevent excessive concentration of share
    ownership
  • Used rarely in OECD countries to
  • ensure minimum investment in government bonds
    (France only)
  • limit use of derivatives (but hedging purposes
    rule common)
  • but in general lighter than for life insurance
    companies

5
Self-investment limit ( assets)
6
Limit on investment in equities ( assets)
7
The Prudent Person Rule
  • Section 404(a)(1)(B) of ERISA requires that a
    fiduciary
  • discharges his duties with respect to a plan
    solely in the interest of the participants and
    beneficiaries and
  • (B) with the care, skill, prudence, and diligence
    under the circumstances then prevailing that a
    prudent man acting in a like capacity and
    familiar with such matters would use in the
    conduct of an enterprise of a like character and
    with like aims.
  • Courts and DOL regulations have clarified the
    rule
  • there has been a thorough consideration of the
    issues
  • there has not been blind reliance on experts.
  • the fiduciary did not ignore or fail to
    investigate any relevant facts that would have
    altered the decision taken.

8
The Prudent Person Approach in the US
  • The prudent person rule is based on three main
    concepts
  • Duty of Prudence
  • Exclusive purpose rule
  • Duty to diversify
  • But it is supported by a range of governance and
    investment regulations stemming from ERISA, DOL,
    and court resolutions
  • Trustee fit-and-proper conditions
  • Conflicts of interest regulation (including 10
    self-investment limit)
  • Independence of custodians
  • Reporting and disclosure rules
  • Individual right of action/litigation

9
The Prudent Person Approach in the UK
  • Self-regulation in the UK up to 1995 Pensions
    Act
  • Duty of skill and care on trustees
  • But until 1995
  • No self-investment limits
  • No independent custodians
  • Few disclosure requirements
  • No minimum funding requirement
  • Main consequences
  • Few incentives for fund managers to overperform
    (herding)
  • Lack of internal funding controls (Maxwell
    1992-4)
  • 1995 Pensions Act has corrected these failings
  • Member-nominated trustees
  • SIP, 5 self-investment limit, and third-party
    admin rules
  • Minimum Funding Requirement (annual funding
    certificates)
  • Disclosure trustees to members and auditors
    actuaries to OPRA

10
The Prudent Person Approach in other EU
countries
  • Regulation of pension fund governance in the
    Netherlands
  • Investment policy pursued should be sound and
    transparent and based on diversification of
    assets
  • Equal representation of employers and employees
    (trade unions)
  • Self-investment limit of 5
  • Minimum funding rule
  • Standardised actuarial rules to permit full
    portability
  • Annual, comprehensive disclosure
  • Broad supervisory and sanctioning powers (from
    1999 supervisor can test board members
    suitability and disqualify people)
  • The EU draft directive is based on a similar
    approach
  • testing the responsibility, competence, and
    integrity of managers
  • effective supervision of prudential (e.g.
    self-investment, MDR) and disclosure requirements
    (SIP, actuary and auditor certification)
  • use of modern diversification and ALM techniques

11
Selected OECD Principles
  • Regulatory policies for employer/occupational
    pension plans
  • Strict enforcement of an institutional and
    functional licensing system on the basis of
    adequate legal, accounting, technical, financial,
    and managerial (competence and honourability)
    criteria
  • Strict limitations on self-investment, unless
    appropriate safeguards exist
  • Liberalisation of investments abroad subject to
    prudent management objectives
  • Transparent accounting methods based on
    comparable standards
  • Enhancement of on-going supervision of the funds,
    including through the transmission of information
    to the authorities
  • Setting up standards for adequate information and
    disclosure to the beneficiaries
  • Promotion of self-regulatory practices for asset
    managers
  • Levelling of the playing-field among operators

12
Selected OECD Principles
  • Principles for the Regulation of Investments by
    pension funds
  • The regulation of investments must
  • simultaneously pursue the twin goals of security
    and profitability
  • be integrated in the overall approach to ensure
    the financial soundness of the fund
  • incorporate both institutional and functional
    considerations
  • find adequate balance between external rules and
    internal controls
  • Strict adherence to basic principles irrespective
    of instrument (quantitative restrictions and/or
    prudent person rules)
  • Diversification and dispersion
  • maturity matching (including the liquidity
    principle)
  • currency matching, in the broad sense
  • Recommendations relating the application of
    quantitative rules
  • No minimum level of investment
  • limits on self-investment and minimum
    diversification requirements
  • list of admitted/recommended assets

13
Pension funds in the OECD
14
Equity investment by pension funds 1980-1998
15
Investment in foreign securities (1997)
16
(No Transcript)
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