Issues of Funding
As populations mature, the relative size of pension liabilities and the related investment risks have grown accordingly and have, in many instances, exceeded expectations. Consequently, greater attention is being called to managing and maintaining funding levels and to meeting payment obligations, which is reflected in greater emphasis on regulatory and supervisory structures.
If one considers the risks of politically motivated misallocation of funds and the fiscal implications of mismanagement, regulatory and supervisory attention must be given to publicly managed funds (see section H.3 below).
The focus on ensuring the soundness of pension sectors also attests to their growing role in, and influence on, global financial markets. The effect of pension funds on the stability of financial markets is transmitted in a number of ways, most notably through their investment behavior. The pension fund sector, especially in Organisation for Economic Co-operation and Development (OECD) countries, is an investor class on its own whose global size and
projected growth means that it can unilaterally move markets through any reallocation of funds. Known as institutional investors, pension funds (along with insurance companies) hold not only tremendous amounts of domestic and international fixed income but also equity assets.
There is no uniform approach to pension supervision, only fundamental elements that guide the oversight framework in many countries. Those prudential and protective rules encompass the following:
• Establishing a “fit and proper” test for funds and managers
• Segregating, diversifying, and performing a valuation of assets
• Imposing checks and balances on fund governance, custodians, actuaries, and auditors
• Guaranteeing extensive disclosure and high transparency on the part of funds through regular financial reporting (on a quarterly basis)
• Ensuring the financial soundness of funds, sometimes by imposing restrictions on certain investments and asset holdings
• Protecting beneficiaries from misconduct and misallocation of funds
• Establishing strong supervisory capacities for financial analysis and frequent inspection, as well as providing an early action tool to contain losses and to protect members
• Shielding supervisors from political pressure
