Governance and Investment of Public Pension Reserve Funds in Selected OECD Countries

Abstract

Many countries around the world are partly prefunding their otherwise pay-as-you-go (PAYG) financed social security systems by establishing or further developing existing public pension reserve funds (PPRFs). Most OECD countries have put in place internal and external governance mechanisms and investment controls to ensure the sound management of these funds and better isolate them from undue political influence. These structures and mechanisms are in line with OECD standards of good pension fund governance and investment management. In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds. However, some specific details of the funds' governance and investment management could be improved in a few countries, such as enhancing the expertise in the funds' governing boards and constraining discretionary interventions by government. Such reforms will ultimately raise the long-term investment performance of the funds and the solvency of social security systems.

Review of the Swedish National Pension Funds

“…The previous OECD review of public pension reserve funds noted that the investment rules for the Swedish funds were potentially restrictive (Yermo, 2008). The following restrictions by asset class have been applied since 2001:…”

“…These investment rules are more restrictive than other reserve funds -with major investment limitations only being in place in Ireland, Japan and Korea (see Yermo 2008). The requirement that at least 30% of the funds" assets must be invested in low-risk, interest bearing securities does not comply with the OECD Guidelines on Pension Fund Asset Management, which do not recommend any floors on asset classes as these can distort markets.…”

“…In their previous report on public pension reserve systems (Yermo 2008), the OECD notes that one potential drawback of this segregated governance model practiced in Sweden is that investment management is separated from the actuarial and payments functions of the social security system. This separation may be impacting the AP funds and partly explain the lack of clarity in their goals and objectives (see previous discussion).…”

Pension Fund Investment in Infrastructure

“…Other charts plot different dots on the chart for early-stage and mature assets, or many more dots for different sectors (see figure 3 for an example). 29 See Yermo (2008) for an overview.…”

Shifting responsibilities in Western European pension systems: What future for social models?

“…The EU Commission's recent White Paper retains the same solution: Europe's citizens must work longer and save more for their old age (EU-Com., 2011). Yet over the past decade returns on investments have been the lowest in living memory, raising current liabilities of funded defined benefit (DB) pensions and prompting debate about how to protect funded pensions against future crises (Yermo, 2008).…”