Decisions, Recommendations and other Instruments of the
Organisation for Economic Co-Operation and Development
Advanced Search
 Searchor
Display for print   SwitchToFrench   
RECOMMENDATIONINSURANCE AND PRIVATE PENSIONS
Recommendation of the Council on Core Principles of Private Pension Regulation
27 September 2016 - C(2016)110

THE COUNCIL,

HAVING REGARD to Article 5 b) of the Convention on the Organisation for Economic Co-operation and Development of 14 December 1960;

HAVING REGARD to the Recommendation of the Council on Core Principles of Occupational Pension Regulation [C(2009)57], which this Recommendation replaces;

HAVING REGARD to the Recommendation of the Council on Good Practices for Financial Education Relating to Private Pensions [C(2008)23] and the Recommendation of the Council on High-Level Principles on Financial Consumer Protection [C(2012)102];

RECOGNISING the important role played by private pensions in retirement income systems worldwide in improving the adequacy of pension coverage and pension benefits;

RECOGNISING the growing importance of defined-contribution and personal pension plans in pension provision and the increased responsibility this places on pension plan members in securing their own retirement income;

RECOGNISING the important economic and social role played by occupational pensions, including the role of employers as plan sponsors;

RECOGNISING the need for appropriate regulation and supervision of private pensions;

RECOGNISING the desirability of an authoritative set of core principles and guidelines for private pension regulation and supervision;

NOTING that the OECD plays a leading role in supporting Members and Partners in encouraging the efficient regulation and management of private pension systems;

On the proposal of the Insurance and Private Pensions Committee:

I.   RECOMMENDS that Members and non-Members adhering to this Recommendation (hereafter the “Adherents”) take due account of the Core Principles of Private Pension Regulation, which are set out in the Appendix to this Recommendation and which form an integral part thereof, when establishing, amending or reviewing their private pension regulations;

II.   ENCOURAGES all institutions involved in the management of private pension systems as well as organisations that represent the interests of pension plan members and beneficiaries to follow this Recommendation;

III.   INVITES the Secretary-General to disseminate this Recommendation;

IV.   INVITES Adherents to disseminate this Recommendation at all levels of government;

V.   INVITES non-Adherents to take due account of and adhere to this Recommendation;

VI.   INSTRUCTS the Insurance and Private Pensions Committee, through its Working Party on Private Pensions, to:

i)serve as a forum to exchange information on progress and experiences with respect to the implementation of this Recommendation;

ii)monitor the implementation of this Recommendation and report to the Council no later than five years following its adoption and as appropriate thereafter.


APPENDIX    

CORE PRINCIPLES OF PRIVATE PENSION REGULATION

The Core Principles of Private Pension Regulation contain general principles that are applicable to all funded private pension plans, as well as specific principles for occupational and personal pensions as defined in the glossary. While the Core Principles apply to all funded private pension plans, Members and non-Members having adhered to the draft Recommendation (the Adherents) may decide to apply it only to occupational pension plans[1]

The Core Principles are separated into three main sections. Six Core Principles in Part I form the general principles applicable to all types of private pension plans. Part II encompasses two Core Principles specific to occupational pension plans. Part III specifies two Core Principles relating to personal private pension plans.

PART I: GENERAL PRINCIPLES

Core Principle 1: Conditions for effective regulation

Private pension systems should have clear and well-defined objectives regarding coverage, adequacy, security, efficiency and sustainability. The achievement of these objectives should be regularly monitored. An effective legal framework, a robust institutional and financial market infrastructure, and a sound regulatory and supervisory system for pensions should be in place to support these objectives.

Well-functioning capital markets and financial institutions should be in place to ensure productive and diversified investment of retirement savings and the efficient management of risks. The development of funded pension systems should go hand-in-hand with the strengthening of the financial markets, based on a sound and integrated regulatory framework for the financial sector and a stable macroeconomic environment conducive to longer-term investment.

Regulation should encourage the development of efficient private pensions. It should ensure appropriate and transparent treatment of different types of operators, and support the provision of cost-efficient pension arrangements.

Regulatory provisions for private pensions should be applied in a comprehensive and dynamic manner. They should take into account the complexity of pension plans, the environment in which the pension system operates and the stability of the economy as a whole in order to ensure that the rights of pension plan members and beneficiaries are protected and that pension plans and pension funds are sound. This framework should not, however, impose excessive burden on pensions markets, institutions, or employers. Reliable data should be available to facilitate the design and implementation of private pension systems.

1.1   Introduction to Core Principle 1

The successful establishment of private pension systems requires clear objectives regarding their role in the provision of retirement income. These objectives should reflect developments in the broader environment, such as economic, financial, market and demographic developments and the functioning of the financial sector, as well as factors specific to pensions, such as the role of public pension plans in retirement income provision, tax treatment and labour market regulations. In this way, a complete view of the pension system is achieved, putting private pensions in a clear context.

Effective implementation and delivery of private pensions is contingent on a legal and institutional framework that ensures sound, effective and well run pension plans. The macro and microeconomic environment also need to be conducive to efficient private pension delivery, including a well-functioning financial sector. This includes encouraging the establishment of financial institutions and other service providers and appropriate and transparent treatment of these in the regulatory framework.

The ultimate goal of pension regulation and supervision should be to protect the rights and interests of plan members and beneficiaries. The regulatory framework should not, however, place an excessive administrative burden on pension plan operators and sponsors nor require them to bear undue costs and risks. It should allow scope for operators within the private pension market to adapt to evolution in the environment in which they operate.

1.2   Implementing Guidelines for Core Principle 1

1.1

Clear and well-defined policy objectives should be established regarding coverage, adequacy, security, efficiency and sustainability of private pension systems, and their role in overall retirement income provision. These objectives should be reflected in legal provisions and their achievement should be regularly monitored as part of the policy and regulatory process.

1.2

The regulatory and supervisory system, institutional and financial market structure, and conduct of the different actors should be coherent, so that each plays a supportive and complementary role in achieving the overall objectives for the system. The regulatory framework should take into account the extent of integration of private pension plans with other systems of retirement income provision, especially public systems.

1.3

The legal provisions should promote the protection of pension plan members and beneficiaries and the soundness of pension plans and funds.

1.4

The legal provisions should facilitate the efficient operation and development of private pension plans by promoting good governance and prudent management, ensuring appropriate and transparent regulatory treatment of different types of operators, and favouring the provision of cost-efficient pension arrangements.

1.5

The development of well-functioning and transparent capital markets and financial institutions should be promoted to enable the development of new financial instruments and markets to support pension provision (e.g., inflation-indexed instruments and retirement annuity markets).

1.6

The legal system should enable the enforcement of contracts pertaining to private pensions. In particular, there should be a body of ethical, professional and trained lawyers and judges, and a court system whose decisions are enforceable. Comparable standards should apply in cases where alternative dispute mechanisms exist.

1.7

Accounting, auditing and, where applicable, actuarial standards for pension funds and pension entities should be comprehensive, documented, transparent and consistent with international standards.

1.8

The legal provisions should promote the availability of data through appropriate reporting and disclosure mechanisms. The availability of this information, including economic and demographic data, will enable regulators and stakeholders to evaluate the design and operation of the pension system relative to its goals and so help ensure that private pension plans are coherent with the objectives set for them and their role in overall retirement provision. Data should be maintained and delivered in a manner that takes full account of their potentially confidential nature.

 

Core Principle 2: Establishment of pension plans, pension funds, and pension entities

Pension plans, pension funds, and pension entities, jointly or separately, should be subject to an adequate, transparent and coherent set of legal, accounting, technical, financial, managerial and governance requirements, without imposing an 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. In the case of occupational pension plans, the pension fund or pension entity should be legally separate from the sponsor (or at least such separation should be irrevocably guaranteed through appropriate mechanisms). The ownership of any financial institution or other entity managing pension plans or plan assets should be clear and transparent.

2.1   Introduction to Core Principle 2

The regulation should set up clear processes for establishing pension plans, pension funds and pension entities. Regulation should appropriately stipulate the different types of funding vehicles permitted for private pension plans. It should clearly set out the permitted legal form of pension plans, funds and entities and the rules that apply for their establishment and operation. For example, the legal provisions where applicable should clearly state the requirements for registration and licensing (e.g. application, modification and withdrawals), governing documents, risk control, reporting and auditing mechanisms, funding policy, investment policy, capital requirements, governance and business plan.

The function and responsibilities of pension plans, funds and entities involved in the provision of private pensions need to be defined, as do those of the plan sponsor in occupational pension plans. The pension entity is an independent entity with legal capacity that has ultimate legal responsibility for a pension fund but which may have a broader range of activities. For example, it might be responsible for investing the assets of more than one fund, or it may carry out other activities related to the management of a single fund, such as custody or administration. An autonomous pension fund can be set up as an independent pension entity. Alternatively, the pension assets may constitute a legally separate account or pool of assets managed by a financial institution or a dedicated provider, which would be considered the pension entity.

Regulations should encourage clear disclosure of the ownership of the pension plan, fund or entity and of the pension plan assets. This facilitates an assessment of conflicts of interest, the sources of initial capital, and the financial and legal suitability of eventual major shareholders or ultimate beneficial owners for licensing, registration and supervisory purposes. Plan members may have either a legal or a beneficial ownership right over the pension assets, or a contractual claim against the pension entity with respect to their rights to the pension assets. The pension assets should generally be segregated from those of the pension entity and the plan sponsor so that they can be invested with the sole objective of funding the retirement benefits of the plan members and beneficiaries.

The licensing and registration processes of pension funds, entities and, where relevant, pension plans, should promote the development of a robust private pensions industry. This can have a significant effect on maintaining public confidence in private pension plans. Licensing and registration processes should reinforce legal provisions in encouraging pension funds, entities and, where relevant, plans to establish appropriate governance and control structures, investment and risk management policies and accounting and control mechanisms, and support prudent investment of the pension assets. The licensing and registration processes should ensure that applicants have policies and procedures that will allow benefits to be delivered to plan members in accordance with the terms of the plan and the pension laws of the jurisdiction.

Licensing and registration procedures should avoid the creation of inappropriate barriers to market access. For example, the licensing authority can be given some degree of discretion in assessing applicants as licensing requirements may vary depending on the type, scale and complexity of the applicant. At the same time, the application process must be transparent, efficient, fair and subject to appropriate redress mechanisms. Applicants should be provided with sufficient guidance to facilitate their fulfilment of the procedural requirements.

The powers of the licensing or registration authority should be clearly specified, as should the criteria for granting, denying, modifying or withdrawing an operating licence or registration. The registration and licensing of financial institutions to perform the functions of pension fund administration and management should be coordinated with the processes of other supervisors or authorities involved in their establishment.

2.2   Implementing Guidelines for Core Principle 2

Legal provisions for the establishment of pension plans, pension funds and pension entities

2.1

Pension funds and pension entities should be established as independent legal entities. Pension funds that themselves constitute a pension entity should have legal capacity. If a pension fund is managed by a legally separate entity (such as a pension fund management company, an insurer, or other financial institution), this entity should have legal capacity. The ownership structure of the pension funds and/or pension entity should be clearly and transparently disclosed.

2.2

Pension fund assets should be legally separate from the assets of any other legal entity, including those involved in managing, administering or acting as custodians of the assets. In the case of occupational pension plans, pension funds or pension entities should be legally separate from the plan sponsor.

2.3

Legal provisions should be in place regarding the type of pension plans and/or pension funds that can be established and the permissible legal forms of pension entities.

2.4

Legal provisions should be in place requiring the registration and/or licensing of pension funds and pension entities (and, where relevant, pension plans) by the relevant authorities. Licensing and/or registration requirements should be public, objective, fair and promote a competitive market. The registration and/or licensing procedures should be an integral part of private pension regulation. These procedures should be efficient, promote market access and contribute to ensuring that pension plans, funds and entities have appropriate governance structures and mechanisms in place.

Governing documents

2.5

Pension plans, pension funds and pension entities should have (jointly or separately) formal, written charters or documents describing their objectives. These documents should set out the plan’s parameters (such as types of contributions and benefits), governance structure, the rights of members and other beneficiaries and any incumbent outsourcing or third party service provisions. They should also clearly identify all parties with authority and responsibilities for the management of the pension plans, pension funds and pension entities.

Risk control, reporting and auditing mechanisms

2.6

Pension funds and entities should have adequate risk control mechanisms in place to address investment, operational and governance risks, as well as internal reporting and auditing mechanisms.

2.7

If they manage more than one pension fund, pension entities should be required to maintain separate accounts and records for each.

Funding policy

2.8

Pension funds and entities that offer defined benefit plans (traditional, hybrid or mixed) or protected defined contribution plans should have a funding policy that specifies the sources of funding, the actuarial method to be used (if relevant), and the mechanisms for fulfilling legal funding requirements.

2.9

The funding policy should specify the funding objective, the level of target funding on an ongoing and termination liability basis, the sources and mechanisms for fulfilling target funding, including potential risks to employer contribution levels , legal funding requirements, and how quickly target funding is projected to be achieved. The policy should be communicated to plan members and other concerned parties.

2.10

Where a pension entity manages assets for different pension funds or plans, separate funding policies and methods should be prepared for each.

Investment policy

2.11

Pension funds and entities should prepare a statement of investment policy.

2.12

Where a pension entity manages different pension funds or plans, separate statements of investment policy should be prepared for each.

Capital requirements

2.13

Pension funds and entities should be required to hold a minimum amount of free, uncommitted starting capital or other equivalent form of financial security. The amount should be dependent on the risks to be covered. The required minimum capital should not be used to cover set-up costs. In order to ensure the guarantee function of the minimum capital, legislation could require that appropriate assets be set aside. Capital requirements may also be satisfied by the purchase of insurance providing the same level of protection to the plan members and plan beneficiaries.

Governance

2.14

Pension funds and entities and, where relevant, plans, should have a governing body that is ultimately responsible for the entity and a code of conduct for the members of its governing bodies and staff. The code of conduct may be laid out in specific legislation applying to pension entities.

2.15

Membership in the governing body of a pension fund, entity or, where applicable, plan, should be subject to minimum suitability requirements.

2.16

Pension funds and entities should be required to keep a functional separation between those staff responsible for investments and those responsible for settlement and bookkeeping.

Business plan

2.17

Pension entities should have a business plan which should include at a minimum (i) a list of the funds that the pension entity will manage; (ii) the types of obligations that the pension entity proposes to incur (e.g. return or benefit guarantees), if any; (iii) the estimated setting-up costs and the financial means to be used for this purpose; (iv) the projected development of the fund; (v) the means for fulfilling eventual capital requirements; and (vi) details regarding the adequate risk control reporting and auditing mechanisms, and a sound investment policy that are in place or to be established at start-up.

Registration and license withdrawal

2.18

Legal provisions should clearly set out under which circumstances registration or a licence can be withdrawn.

2.19

Legal provisions should grant a pension fund, entity or, where applicable, plan, whose registration and/or licence has been withdrawn the possibility to appeal the decision and have it reviewed.

Role of the registration and/or licensing authority in supervisory matters

2.20

Legal provisions should establish the role of the registration and/or licensing authority in the wider supervisory and regulatory system. Where registration, licensing and supervisory authorities are separate, the legal provisions should require the supervisor to be consulted on each specific licence application.

Clarity of the registration and/or licensing application procedure