PensionReforms' summary and comments
A recent PensionReforms' abstract here reviewed a 2008 World Bank report on four newish 'public' pension investment funds.  This 2008 OECD report tests a wider group of eight countries (Canada, France, Ireland, Japan, Korea, New Zealand, Norway and Sweden) against the "OECD standards of good pension fund governance and investment management" and finds them "largely compliant".

"In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds.  However, some specific details of the fund's governance structure and investment management could be improved to better isolate them from undue political influence, ensure a level-playing field in the institutional investment market, and to enhance the expertise in the management of the funds."

The following summarise the tests applied by the report - the "reserve funds" should:
-   ".be under the ultimate oversight responsibility of a board (the governing body) composed of members with the necessary collective investment knowledge and experience to carry out their functions effectively."
-   ".be served operationally by an autonomous management entity, dedicated exclusively to the administration and investment of the reserve fund assets."
-   ".aim to carry out as much as possible of their investment via external asset managers, selected where relevant (mandates) via a competitive bidding process."
-   ".have clear mandates and specific measurable objectives, such as funding ratio and investment return targets. The performance of the board should be measured against these objectives."
-   Have "legal investment restrictions [that] should be limited to those concerning basic diversification, such as exposure to single issues or issuers. The setting of restrictions on broad asset classes should be left to the board of the reserve fund as part of the design of the investment policy."
-   ".be subject to a strict disclosure policy, requiring them to make their annual report publicly available, containing its audited financial statements as well as information on asset allocation and performance."

"The study has revealed that the reserve funds surveyed follow most of the practices above. In particular, there is a high degree of public disclosure and oversight by parliament or public sector entities and relevant experience requirements on board members, though these vary across countries. There are only a few exceptions to this generally positive assessment. For example, the Korean and the Norwegian reserve funds are under a governing body housed in a ministry, rather than under an independent committee or the board of an autonomous management entity. The asset allocation of the Japanese reserve fund (the GPIF) is also decided by a Ministry, rather than the GPIF's board. In the other countries surveyed, the governing body is either an independent committee or the board of an autonomous management entity, and its members are required to have some expertise and knowledge in investments and fund management. The absence of an arms-length relationship between the government and the reserve fund's governing body can also facilitate political interference in the management of the fund. Both the Japanese and Korean reserve funds have been used in the past for financial stability and developmental goals that may come into conflict with their stated objective to achieve a good investment performance in order to improve the financing of the pension system."

Norway has an apparent problem because the reserve fund there is not directly tied to pensions - too flexible, suggests the report.

Other funds have less than clear investment mandates or targets in the context of the OECD Guidelines on Pension Fund Asset Management.

"In countries such as Korea, Japan and Norway where the ultimate decision-making body is a government ministry or parliament, changes in the fund's investment policy can also become mired in political debate."

Ideally, according to the report, external asset managers should be used to reduce ".the possible concerns over political influence and public control of private companies. However, for some of the larger funds, the direct investment of part of the portfolio is an inevitable consequence of the attractions of economies of scale."

But the overall standards of governance and investment management amongst the eight countries' funds are "relatively high" but some could do better.  The report suggests that the analysis could usefully be extended to non-OECD countries.  PensionReforms expects that the report cards for those will probably show 'considerable room for improvement'.  

PensionReforms notes that the report did not really question the need for the pension reserves and that wasn't the objective.  It might help public debate in the subject countries if that were the topic of specific study on the 'why?' rather than, as here on the 'how?'.  The pension reserve funds in any of the affected governments with any public debt (that's all the eight countries covered here) are effectively 100% leveraged.  It is often a bad idea for individual savers to borrow to invest, particularly in financial assets.  The same applies to governments.   (File size 396 KB; 43 pp) 373