07 December 2011

OECD/IOPS Good Practices on pension funds' use of alternative investments and derivatives

In 2008, the International Organisation of Pension Supervisors (IOPS) approved a set of ‘Good Practices in the Risk Management of Alternative Investments by Pension Funds’, designed to provide guidance to pension funds as to what sort of risk management arrangements pension supervisors expect pension funds using these products and instruments to have in place. The Organisation of Economic Cooperation and Development (OECD) produced a set of ‘Guidelines on Pension Fund Asset Management’ in 2006. The two organisations then jointly surveyed their members in 2010 to investigate the current regulatory practice regarding alternative and derivative investments, market practice and the state of risk-management pension funds employ in relation to these instruments. These revised Good Practices stem from this survey and are intended to update and develop the previous IOPS/OECD guidance relating to pensions funds’ use of alternative investments and derivatives. They also draw on the IOPS 'Principles of Private Pension Supervision', the International Association of Insurance Supervisors (IAIS) ‘Supervisory Standard on Derivatives’, as well as the work of the Basel Committee on Banking Supervision (BCBS).

The Good Practices outline how supervisors should oversee such investments and suggest possible regulatory controls. The character of the Good Practices emphasises the overriding principle that it is the responsibility of pension funds to develop their own alternative investment and derivatives policies in a responsible manner. As such, the Good Practices may also help and encourage pension funds to improve their risk management practices and thereby use these instruments safely and effectively.

Despite country-specific situations and supervisory approaches, the OECD and IOPS believe that general Good Practices relating to pension funds’ use of alternative investments and derivatives can be identified, and will be helpful to IOPS and OECD members in the supervision of their pension systems. Although these Good Practices therefore serve as a benchmark reference for all countries or jurisdictions, the question of how best to apply them in practice should take into account country-specific conditions and circumstances, including the extent to which regulations permit the use of such investments.

These Good Practices cover the regulation and supervision of private pensions, including both work-based occupational pensions and personal private pensions. Though mainly referring to pension funds and pension plans, a range of other market participants may be involved (such as plan sponsors or financial institutions serving as external service providers). The pension supervisory authority refers to the institution (mostly governmental agencies), which is empowered to supervise and oversee pension funds. It is noted that in some countries this authority is a separate agency, while in many other countries it is integrated with the oversight of other financial activities into a single supervisory body.

Full paper

© IOPS - International Organisation of Pension Supervisors