Overview of pension fund governance in OECD countries Contractual Savings Conference: Supervisory Issues in Life Insurance and Private Pensions, 29 April – 2 May 2002 Washington, D.C. Juan Yermo, OECD

Basic definitions (draft OECD/INPRS taxonomy) Pension fund = pension assets Pension entity = entity that owns titles to pension fund assets (IORPs in EU nomenclature) Pension plan = contract, tax qualified retirement savings programme

Three reasons to understand pension fund governance Pension fund governance  Pension fund performance  Retirement income Pension fund governance  Corporate performance The main stakeholders (members/beneficiaries of the fund) have limited redemption rights

The complexity and variety of pension fund governance Legal form of pension entity –Is the pension entity devoid of legal personality and capacity? –Do plan members have legal or beneficial ownership over the pension fund assets? Functions of pension entities –Is the pension entity simply a vehicle for holding collectively titles to pension assets or does it also have responsibility for administering the pension fund, and may be also the pension plan?

Legal taxonomy of pension entities Legal ownership to pension fund Beneficial ownership to pension fund Entity has legal personality Corporate formFoundation, trust Entity is devoid of legal personality Individual contractual form Collective / group contractual form

Examples of pension entities and their functions Trust form: –Canada, United States: trust is a vehicle for asset separation, trustees’ role can be limited to holding legal title to pension assets. Fiduciaries are responsible for pension fund and pension plan administration. –Australia, Ireland, United Kingdom, New Zealand: trustee also has responsibility over pension fund and pension plan administration

Examples of pension entities and their functions (cont.) Foundation: –Iceland, Netherlands, Switzerland: pension entity has responsibility over pension fund and pension plan administration –Italy: pension entity must delegate to external service providers

Examples of pension entities and their functions (cont.) Corporate: –Mexico: pension entity (SIAFORE) must delegate administration of pension fund to special purpose, pension fund managing company (AFORE) –Hungary: pension entity has responsibility over all aspects of pension fund and pension plan administration

Examples of pension entities and their functions (cont.) Individual contractual form: –Poland (and most Latin American countries): pension fund administered by special purpose, pension fund managing companies Collective/group contractual form: –Japan, Portugal, Spain: pension fund administered by existing financial companies as well as special purpose, pension fund managing companies

Pension fund governance Governing body / administrator: person or entity vested with the power to administer the pension fund –The internal governing body of the pension entity in e.g. Australia, Hungary, Ireland, Netherlands, Switzerland, and the United Kingdom. –The fiduciary (plan sponsor, investment manager, trustee) in Canada and the United States –The pension fund managing company in Mexico and Poland –The financial company responsible for managing the pension fund in Japan, Portugal and Spain … i.e. the governing body of the fund and entity may be not be the same

Guidelines for pension fund governance Identification of responsibilities in the pension entity’s by-laws/statutes or the plan contract Accountability and suitability of the governing body Delegation and expert advice Special functions: auditor, actuary, and custodian Governance mechanisms: internal controls, reporting, disclosure, and redress

Main trends in pension fund governance Increasing responsibility and stricter suitability standards for the governing body – in many countries, the pension entity is devoid of responsibility to administer the pension fund: –In the United States, financial companies increasingly act as the main governing body of pension funds –In Italy, Portugal, and Spain, only financial companies can act as governing body of a pension fund –In Mexico (and other Latin American countries) and Poland only specialised financial institutions can act as governing body of the pension fund

Main trends in pension fund governance (cont.) Increasing responsibility and stricter suitability standards for the governing body of the pension fund, even when this is still part of pension entity: –Mandatory delegation of asset management and benefit payment in Italy –Greater reliance on external advice and management in the United Kingdom –In the Netherlands, operational arm of pension entity being spinned off as separate legal entities (e.g. Phillips pension fund)

Conclusion Pension entities becoming increasingly “control centres” with fewer operational responsibilities Need for independent monitoring of the governing body of pension funds through auditors, custodians and oversight committees For occupational plans, practically all OECD countries have opted for parity in employer-employee representation in the governing body of the pension fund or in oversight committees (e.g. Spain) Legal liability of the governing body needed for accountability to plan members