Regulation and Supervision of Private Funds

Private pension plans are schemes administered by an employer, a pension entity, or a pri­vate sector provider. They may either complement or substitute for social security systems and may include plans for public sector workers (Yermo 2002, p. 3). The regulation and supervision of privately run pension funds is equally as important as that of public plans and increasingly so as more countries move toward a mix of public and privately run plans. In addition, governments have moved toward contracting out the investment arm of their pension programs to private fund management companies.

Privately managed or independent funds rely heavily on professional asset manage­ment. As such, “trust” in the integrity of managers and the solvency of funds is funda­mental to securing the confidence of both sponsors (government, private company) and employees that their retirement savings are not mismanaged (Carmichael and Pomerleano 2002). Accordingly, the focus of supervision is on ensuring high transparency plus strong reporting and conduct rules.

The primary regulatory tools for managing private pensions are (a) licensing require­ments to ensure the high quality of asset managers, (b) disclosure standards, (c) gover­nance standards, and (d) minimum capital requirements (Carmichael and Pomerleano 2002, p. 113). Because the investment decision is out of the control of employees, the strength of the regulations regarding investment regimes and their enforcement is par­ticularly relevant.

The OECD, recognizing the importance of protecting pensions provided by employers, developed guidelines for regulation, which are summarized in the following paragraphs.

Occupational pension plans have raised regulatory concerns, because of the inherent risk they bear from their exposure to capital market volatility. Any unexpected declines in equity or bond prices have the potential to cause significant losses in a fund, thereby posing serious threats to a worker’s expected retirement funds. The rise in occupational pension schemes has called attention to requiring greater accountability on the part of private entities. In recognition of those risks, the OECD has established the six Core Principles of Occupational Pension Regulation (see table H.1). The goal of those recom­mendations is to mitigate the risk of pensioners and to provide standards for the funding of company pension schemes.

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