The Organization for Economic Co-operation and Development has issued new guidelines on pension fund asset management in an effort to set international standards for the oversight and day-to-day management of pension fund investments.
They call on regulators to give pension funds more flexibility in their investment choices, and on trustees to be more diligent in monitoring their fund’s investments.
The OECD guidelines, endorsed by all 30 member governments, propose that funds follow the so-called “prudent person” rule, and hence:
- define an overall investment policy and actively follow it;
- require the governing body to act in the “best interest” of beneficiaries when investing pension plan assets;
- establish internal controls and procedures to effectively implement and monitor the way investments are managed; and
- identify and measure the risks to which the fund is exposed and put in place mechanisms to monitor and manage those risks.
To give trustees a clear picture of how the pension fund is performing, the market value of the fund’s assets and liabilities should be disclosed on a regular basis, the OECD says “This will give trustees early warning of a fund’s underperformance and enable them to take quick corrective action.”
Also, it suggests that legal provisions should not prescribe a minimum level of investment for any given category of investment, nor prohibit investment abroad by pension funds. Furthermore, portfolio limits should be set only in specific instances, for example, to limit investment in the securities of an individual company or in shares of a fund’s sponsoring employer and/or its asset manager.