- Governance of pension funds is related to their legal form, which can be institutional, contractual, or trust-based. Key governance challenges include managing conflicts of interest, transparency, and member understanding. - Pension funds should have a governing body, minimum expertise requirements, and separation of responsibilities. The investment strategy should follow prudent and diversified approaches. - Fees have decreased on average due to growing assets, legal caps, and cost disclosure. Most schemes charge fees on assets but some also use contributions or returns. - Investment returns have varied by country but have mostly been positive on average. Asset allocation differs across countries but commonly includes equity, bonds, and other assets.

1. EMERGING BEST PRACTICE:
GOVERNANCE, MANAGEMENT,
INVESTMENT AND FEES
EESTIPANK - IMF
PENSION POLICY WORKSHOP
September 30, 2019
Tallinn
Dariusz Stańko
Senior Private Pensions Expert
IOPS Secretariat, Head
dariusz.stanko@oecd.org

2. Governance

3. The structure of the governing body and nature of governance
problems are highly related to the legal form of the pension
fund
• institutional (fund an independent entity with legal personality
and capacity, has its own governing body)
• contractual (fund a pool of assets with/out legal personality and
capacity, governed by separate entity, typically a financial
institution)
• trust (fund’s legal form)
Types of funds from the governance perspective

4. • Competency and expertise of the governing body and internal
controls
• Quality of risk management, internal controls, and managing
scheme administration
• Conflicts of interest
o Staff/governing body (identification and management of conflicts)
o CEE/LA mandatory DC funds’ members vs fund administrators (financial
institutions), e.g. preference for active over passive management, higher
fees
• Governing bodies - lack of/need for guidance from regulators
• Transparency and disclosure of information to pension fund
members + Members’ understanding and their informed choices
(particularly DC) – potential for moral hazard and agency problems
Typical governance challenges

5. Core Principle 2 Establishment of pension plans, pension funds, and
pension entities:
• Pension plans/funds (…) should be subject to an adequate,
transparent and coherent set of legal, accounting, technical,
financial, managerial and governance requirements, without
imposing and excessive administrative burden
• Pension fund assets should be legally separate from the assets of
any other legal entity, including those involved in managing the
pension plan assets.
• Implementing principles (IPs)
o IP 2.14 should have a governing body
o IP 2.15 minimum suitability requirements for members in the
governing body
o IP 2.16 functional separation for those staff responsible for
investments and those responsible for settlement and bookkeeping
OECD Core Principles of Private Pension Regulation
(2016)

6. Core Principle 3 Governance:
• Regulations (…) should be guided by the overriding purpose of
serving the best interests of plan members and beneficiaries and
ensuring the soundness of pension plans (…)
• The governance (…) should ensure an appropriate division of
operational and oversight responsibilities, and the
accountability and suitability of those with such
responsibilities.
• Pension funds and pension entities should have appropriate
control, communication and structures that encourage good
decision-making, proper and timely execution, transparency, and
regular review and assessment.
• The governing body (…) should ensure that the investment strategy
follows a prudent approach and, where applicable, takes into
account the profile and duration of its liabilities.
OECD Core Principles of Private Pension Regulation

7. Management

8. Core Principle 4 Investment and risk management
• IP 4.1. retirement income objective, prudential principles
(security, profitability, liquidity, diversification, asset-liability
matching)
• IP 4.2-4.4 prudent person standard (self-dealing, fiduciary duty,
rigorous investment process)
• IP 4.5-4.12 investment policy (actively observed written
investment policy statement, clear investment objectives, asset
allocation strategy, performance objectives and monitoring,
deviations, alternative investments, sound investment process,
provision of investment options including a default option, identified
responsible parties, periodic review of investment policy)
• IP 4.13 portfolio limits (no minima, not to impede diversification
and risk management e.g. ALM, maximum levels procedures to
correct breaches, avoid self-investment)
OECD Core Principles of Private Pension Regulation

9. Fees

10. • Increased transparency (simplification of fee structures,
comparability sites, net of costs, high-water marks, performance
fees)
o IOPS study: 77 schemes out of 85 (or 41/44 jurisdictions) use fees on
assets, 22 jurisdictions contributions, 11 jurisdictions performance
fees, 7 jurisdictions salaries
o 35 schemes (42%) charged fees on one component only;
either on contributions, salaries, assets or returns; 36 schemes
(43%) fees charged on two different components, and 12 schemes
(14%) had fees charged on three components.
• Decreasing fees (due to growing AuM, legal caps, auctions, cost
disclosure requirements)
International trends

11. • 85 different pension schemes in 44 selected jurisdictions. Current market
average values and the legal ceilings.
• 14 comparable jurisdictions 2018 vs 2014 studies: decrease of average fees, 8
jurisdictions lowered legal caps and 1 increased, 6 did not change
• What pension plan members pay for in their fees? (clusters, see tables below).
And what else are they charged? Supervisors don’t have knowledge on the
quantified impact of cost items outside of the fees already paid.
• Charge ratios by clusters, 40-years: 19-22% the two most comprehensive
clusters where fees incorporate all or most of the reported cost items.
• No substantial differences in charge ratios due to the number of fee
components but occupational DC and personal plans linked to employment
generally much more cost effective than personal schemes with no
employment link.
IOPS (2018) on fees and charges

12. Jurisdiction
Plan/scheme
administration
fees
Investment management fees,
for: Custodian
fees
Investment
transaction
costs
Guarantee
fees
Cluster
Primary funds
only
Underlying funds
Namibia ● ● ● ● ● ●
A
Poland ● ● ● ● ● ●
RussianFederation ● ● ● ● ● ●
BelgiumPensioenspaarfonds ● ● ● ● ●
Belgium Branche21life
insurance
● ● ● ●
BelgiumBranche23life
insuranceoperatedbyan
insurancecompany)
● ● ● ● ●
Australia ● ● ● ● ●
Ghana ● ● ● ● ●
Serbia ● ● ● ●
Jamaica ● ● ● ●
HongKong,China ● ● ● ● ●
B
Liechtenstein ● ● ● ●
India ● ● ● ●
Korea ● ● ● ●
Nigeria ● ● ● ●
Mauritius ● ● ●
Bulgaria ● ● ●
Source:
IOPS
(2018).

13. Jurisdiction
Plan/scheme
administration
fees
Investment management fees,
for: Custodian
fees
Investment
transaction
costs
Guarantee
fees
Cluster
Primary funds
only
Underlying
funds
Peru ● ● ● ● ●
C
Chile ● ● ● ● ●
Romania(2nd pillar) ● ● ● ● ●
Mexico ● ● ● ●
Slovak(2nd pillar) ● ● ● ●
Latvia(voluntarypensions) ● ● ● ●
Portugal ● ● ● ●
Turkey ● ● ● ●
Hungary ● ● ●
Slovenia ● ●
Romania (3rd pillar) ● ● ●
D
NorthMacedonia ● ●
Albania ● ●
Ireland ● ●
Colombia ● ●
Spain ● ●
CostaRica ●
Israel ●
Slovakia(3rd pillar) ● ● ●
ELatvia(mandatorypensions) ● ● ●
CzechRepublic(transf.funds) ● ● ●
CzechRepublic(part.funds) ● ● ●
Source:
IOPS
(2018).

14. Average management fees charged
by fund managers (as a percentage of assets)
Source: Ministry of Finance
(2019), Pension Statistics
Overview 2018,
https://www.pensionikesku
s.ee/wp-
content/uploads/rahandus
ministeeriumi-
statistika/Pensioni-
statistika%C3%BClevaade-
2018-1.pdf.

15. Fees or commissions charged to members of DC plans
in selected countries (as a percentage of total assets)
0
0.5
1
1.5
2
2.5
Source: OECD Global
Pension Statistics.

16. Investment

17. Real investment rates of return of pension assets,
net of investment expenses, 2003-2018 (in per cent)
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
min max Estonia OECD average
Source: OECD Global
Pension Statistics.
Preliminary data for
2018.

18. Asset allocation of
pension funds in
selected investment
categories in 2018
(as a percentage of total
investment)
0.0 20.0 40.0 60.0 80.0 100.0
Poland
Australia
Netherlands
Lithuania
Finland
Belgium
Chile
Iceland
Norway
Estonia
Austria
New Zealand
United States
Canada
Latvia
Ireland
Israel
Denmark
Italy
Portugal
Mexico
Spain
Greece
Turkey
United Kingdom
Japan
Hungary
Luxembourg
Germany
Slovak Republic
Slovenia
Czech Republic
Equity Bills and bonds
Cash and deposits CIS (when unavailable look-through only)
Other
Note: Preliminary data.
Source: OECD (2019), Pension
Funds in Figures.

19. • International experience of low participation in voluntary
pension arrangements as compared to mandatory
participation (due to procrastination, myopia, inertia and
people’s misperception of their retirement preparedness)
• Automatic enrolment into funded pension plans (e.g.
Italy, Lithuania, New Zealand, Poland and the UK) or soft
compulsion, where the default is for individuals to join the
system with the possibility to opt out afterwards.
• Allowing early access to second pillar savings may increase
the risk of inadequate pensions at retirement – potential
interactions with minimum pension/social assistance?;
potential impact on local capital market (stocks, T-bonds)
Money to the people?

20. • diversification of retirement sources (PAYG vs FF) is
desirable: different or lagged shock transformation
mechanisms (demographic risk, investment risk, political risk)
• Dismantling, making the system voluntary vs improving it?
Some areas for improvement could be
o diversification/alternative assets
o life cycle fund as a default
o fees and costs
o industrial organisation
Funded pillar

21. • Asset allocation (commercial bonds, alternative investments, infrastructure,
foreign investment)
• Cost reduction
o Cost transparency via improved reporting of costs, managers get greater cost awareness and
identify the areas where costs can be reduced. (c.f. Dutch pension funds who initialised more
granular cost reporting to stakeholders.)
o Fee comparability vs performance fee
o Pricing regulation: Estonia already uses fee caps and a regressive scale to reduce fees charged to
plan members
• Structural solutions: measure to strengthen competition through market
interventions
o Auction process (e.g. Chile and New Zealand), fund managers bid for the right to enrol
new members joining the system.
o Cost reductions: marketing costs could be reduced by limiting the active customer
acquisition (relevant for Estonia?). Operational costs could be reduced by introducing
central administration body and leaving pension funds (or possibly also other institutional
investors) with investment function only (Sweden)
o Improvement of governance (visiting committees assessment, members representation?)
Some ideas to improve funded pensions

22. Thank you!