Contractual Savings Conference: Supervisory Issues in Life Insurance and Private Pensions,

1
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

2
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

3
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

4
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?

5
Legal taxonomy of pension entities
Legal ownership to pension fund Beneficial ownership to pension fund
Entity has legal personality Corporate form Foundation, trust
Entity is devoid of legal personality Individual contractual form Collective / group contractual form
6
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

7
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

8
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

9
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

10
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

11
Guidelines for pension fund governance

• Identification of responsibilities in the pension
  entitys 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

12
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

13
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)

14
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