A Framework for Public Pension Fund Management
Annex 1.B: Index of Governance Framework Document— 1
5. Consequences of Failure to Meet Responsibilities
5.1 Indemnity under the APRA Act
5.2 Consequences of breaching the CAC Act
Appendix A—Statutory Responsibilities of Board Members Commonwealth Authorities and Companies Act 1997
Australian Prudential Regulation Authority Act 1998
Appendix B—Matrix of Delegations Treasurer’s delegations
Board’s delegations
Notes
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1. Possibly the best known of the publicly managed mandatory schemes are those operated by Asian countries such as Singapore and Malaysia.
Australia, in contrast, runs an unfunded public pension scheme that is not linked to wages during employment, alongside a privately man-aged mandatory contributory scheme.
2. The Korean scheme began to operate only in 1988.
3. It should be noted that three quarters of total global assets are those in the partially funded plans of Japan and the United States.
4. See, for example, the definitions given by the OECD (1999 p. 2 and 2001 p. 1).
5. The IMF practices are set out in detail in the Code of Good Practices on Fiscal Transparency and the Code of Good Practices on Transparency in Monetary and Financial Policies. Both are available on the IMF’s website at http://www.imf.org/external/standards/index.htm
6. For example, in Croatia parametric changes involving the index-ation of pensions in progress were rejected by the courts, resulting in a large liability related to retroactive pension payments (Anusic et al. 2003).
7. Although the taxpayers forced to fund deficiencies may well be the taxpayers of future generations.
8. For more information about the CPP, see the Government of Canada’s website at: www.cppib.ca.
9. Most countries use representative boards; only three are known to use purely professional boards (Palacios 2002). See the paper by Hess and Impavido for this conference for additional detail regarding board size and composition and other governance practices in a sample of developing country public pension funds.
10. Among other things, candidates are required to have: sound judg-ment; analytical, problem-solving and decision-making skills; the capacity to quickly become familiar with specific concepts relevant to pension fund management; adaptability; high motivation; ethi-cal character and a commitment to serving the public; experience in a senior capacity in the financial industry; broad investment knowledge; experience as a chief financial officer or treasurer of a large corporation or government entity or consulting experience
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in the pension area; and a generally recognized accreditation as an investment professional.11. For more information about the New Zealand public pension scheme see McCulloch and Frances’ (2003) paper prepared for this conference and the New Zealand Government website: www.treasury.govt.nz/release/
super/#15October.
12. Even in this case however, parallel regulations defining the level of par-tial funding could be applied.
13. See Anne Maher’s (2003) paper prepared for this conference. The full text of the National Pensions Reserve Fund Act is available on the online at: www.ntma.ie/Publications/Pen_Res_Fund_Act_2000.pdf.
14. Since writing this paper the authors have become aware of a gover-nance questionnaire prepared by the Canadian Association of Pension Supervisory Authorities (CAPSA) for private pension fund managers.
This questionnaire, which covers much of the issues raised in our sug-gested question lists was sent to Canadian pension fund managers for finalization in July 2003. Information about the questionnaire can be found at the website of the Association at www.capsa-acor.org.
15. See Australian Government (2003). In this review, the Australian gov-ernment found that the combined impact of these factors was minimal for around 15 years, after which it generated a growing fiscal gap that reached 2 percent of GDP by 25 years and 4 percent by 35 years.
16. Annex 1.A provides one example of a general investment policy state-ment by one of the largest public pension funds in the world, the ABP in the Netherlands.
17. The one area in which prohibitions or restrictions may play a positive role is with respect to investing in the government’s own securities. See, for example, Maher (2003) for details of the Irish public pension fund’s prohibition of investment in Irish Government securities.
18. Canada, Ireland, and New Zealand are among the few countries that state clearly that the purpose of the scheme’s investments is solely to benefit members.
19. See Iglesias and Palacios (2000) and Hess and Impavido (2003).
20. For example, as noted earlier (Maher 2003), the Irish Public Pension Scheme imposes such a prohibition.
21. Singapore, for example, has instituted such a policy.
22. This raises the additional issue of administrative costs associated with
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the loan program, which may be charged to the fund, thereby negatively affecting the accumulation.
23. See the chapter by John Ilkiw (2003) prepared for this conference with regard to strategic decisions on asset class allocation.
24. For example, the Canadian Pension Plan Investment Board (CPPIB) states its funding ratio target explicitly and its target real rate of return is consistent with this objective.
25. Investment process: The entire body of rules which ABP describes as “the investment process” consists of the following: a) Provisions in the Dutch Pension and Savings Fund Act; b) Provisions in the articles of organiza-tion of the foundaorganiza-tion ‘Stitching Pensioenfonds ABP’; c) Regulaorganiza-tion on Investment Procedures, which stipulates the tasks and responsibilities of the Governing Board, Board of Directors and Investment Committee in the decision-making process regarding investments; d) The Investment Committee Regulation, which stipulates the composition, tasks and working methods of the investment Committee; e) Rules relating to the internal power of decision and the external power of representation, i.e.: The Regulations for the division of responsibilities of the Board of Directors, the Regulations for the Board of Directors, the competence rules for ABP Investments, and the powers of attorney as registered in the Commercial Register; f) The risk parameters established by the Governing Board; g) The Manual on Market Risk Management and the Credit Risk Manual; and h) The Code of Conduct, which contains rules of conduct to combat conflicts of interests.
26. Article 15, section five, of ABP’s articles stipulates that, with a view to making investments, the Governing Board of ABP should establish a Regulation on Investment Procedures. The Regulation on Investment Procedures deals with the duties and responsibilities of the Governing Board, Board of Directors and Investment Committee in the decision-making with regard to investments.
27. The desired strategic asset allocation, the return target per asset class and the currency policy .
* The foundation ‘Stitching Pensioenfonds ABP’ is registered in the Commercial Register of the Chamber of Commerce and Industry for South Limburg under registration number: 41074000.
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28. Investment Instruments and investment techniques: This passage describes the use of derivatives within the investment policy. Whether a transaction in a derivative instrument is prudent is answered in the same way as an investment in underlying assets, namely in the light of the investment in underlying assets, namely in the light of the invest-ment process described and the terms and restrictions contained in it.On this basis it can be assessed whether the transaction contributes to the achievement of the investment goals. This agrees with the view of the Pension-en verzeke- ringskamer (pensions and insurance supervisory authority of The Netherlands) as described in its circular of April 24, 1996. In this document it states that the use of datives by a pension fund or insurer is assessed according to guidelines “analogous to the requirements which apply to the general investment policy”. One of the guidelines is:
The role and use of derivatives in the general investment policy should be clearly elaborated and formulated and meet the require-ments of solidity and prudence. There should be unambiguous inter-nal guidelines for, amongst others, the kinds of permissible deriva-tives and the permitted use, including for example position limits and permitted counterparties.
29.In the Manual on Market Risk Management the following subjects are dealt with: a) Aims; b) Investment process; c) Organization of Risk Management; d) Control of market risks (definition, quantification (ratios), control); e) Performance measurement and attribution; f) Systems; and g) Procedures.
30. Socially initiated investments: ABP considers this to be a practice whereby investments are made or not made primarily with a view to achieve a social objectives. A socially initiated investment may take two forms:
(i)certain investments are refrained from in order to put pressure on the party seeking capital, or (ii)certain investments are made with the inten-tion to influence (for example, by exercising shareholders’ rights- socially undesirable behavior).
Economically targeted investments: This is understood by ABP to be investments primarily made with a view on securing concomitant eco-nomic results that are considered desirable by interested parties. For
example, maintaining employment in a certain economic activity (ven-
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ture capital), maintaining a certain industry in a region or a country.
31. Human rights are laid down in treaties concluded by treaty-conclud-ing parties. These treaties sometimes include obligations involvtreaty-conclud-ing effort: the nations are obliged to strive for a certain aim, for example, by introducing legislation. The so-called ‘basic social rights’, in par-ticular, require an effort on the part of the treaty-concluding nations.
The nations need to create the preconditions within which these basic rights may fully come into effect. Examples of basic social rights are, for instance, to be found in international labor law.
Absolute human rights and fundamental freedoms, on the other hand, may be called upon without further (national) legislation. No one may be subjected to torture; everyone has the right to privacy; everyone has the right to freedom of speech.
The nature of these rights and freedoms imply an immediate applica-bility; they are always in effect.
32. The organization for Economic Co-operation and Development (OECD), the International Corporate Governance Network (ICGN) and the Council of Institutional Investors have drawn up such principles.
33. Examples of correction mechanisms might be: a powerful Supervisory Board independent of the Board of Directors; a system of proxy voting also accessible to institutional investors and proxy solicitation; a very liquid share whereby the investor has an option to ‘implied voting’ (the Wall Street rule) without risking adverse effects on his investment; a company which might become the object of a take-over-bid due to the absence of anti take-over devices. In ABP’s opinion, it is difficult to align the application of the Dutch so-called structure regime, an accu-mulation of oligarchic regulations and anti take-over devices with the aim of creating correction mechanisms.
34. Examples of correction mechanisms might be: a powerful Supervisory Board independent of the Board of Directors; a system of proxy voting also accessible to institutional investors and proxy solicitation; a very liquid share whereby the investor has an option to ‘implied voting’ (the Wall Street rule) without risking adverse effects on his investment; a company which might become the object of a take-over-bid due to the absence of anti take-over devices. In ABP’s opinion, it is difficult to align the application of the Dutch so-called structure regime, an
accu-1
mulation of oligarchic regulations and anti take-over devices with the aim of creating correction mechanisms.35. This refers to a practice of disclosing such information to persons such as analysts, brokers, bankers or investors outside the scope of the company and its advisors.
36. This refers to a practice of disclosing such information to persons such as analysts, brokers, bankers or investors outside the scope of the company and its advisors.