INTERNATIONAL NETWORK OF PENSION REGULATORS AND SUPERVISORS CENRTAL AND EASTERN EUROPEAN REGIONAL NETWORK Investment of Pension Funds: Challenges for the Regulation and Supervision at the occasion of Pension Reform in Eastern Europe, Experiences and Perspectives Kiev, Ukraine, May 27-28, 2004 Tibor Parniczky Regional Coordinator of INPRS Consultant of ILO

Approaches to investment function Defined Benefit vs. Defined Contribution In-house asset management vs. outsourcing Qualitative regulation v.s. Quantitative limits Performance of the pension fund: balance of –Returns on investment, and –Costs

Charges and returns Leaving all other parameters unchanged, how much return would make up the loss of charges?

Returns and accumulated funds Accumulated funds as % of accumulation with return of 5%

Example of Hungary Market structure of the private pension funds in Hungary

Example of Hungary Size distribution of the Voluntary Pension Funds in Hungary

Example of Hungary The management costs of the Hungarian VMBFs in 2002

Example of Hungary Charges Proportional to the Assets Managed in the VMBFs in Hungary 2002

Example of Hungary Investment Performances of the Groups of Hungarian VMBFs In the Period of

Investment standards - EU Prudent person rule is defined in the Pension Directive –Member states may apply restrictions on prudential basis, but even in this case 70% limit might be applied to shares and other securities traded on regulated markets; 30% in non-matching currencies; for risk-capital: prudent person concept; dispersion 5% in the same issuer and 10% at group level –In case of cross-border activity stricter rules might be applied with respect to regulated or not regulated markets, and guaranteed investments Statement of Investment Principles Information disclosure Adequate supervision

Investment principles – OECD and INPRS Investment regulation should be based on the prudential objectives of the pension funds’ investment function, taking into account security and profitability, and implemented using concepts of diversification, dispersion, maturity and currency matching, and risk management. Pension fund investment and governance are regulated by the same concept: In a pension fund the investment management is the governing body’s responsibility –The governing body may delegate this duty to advisors and other professionals. –The duty to accept and approve the investment policy of the pension fund is remains with the governing body. The governing body defines –the process of investment activities, including the establishment of the statement of investment policy, –appropriate internal controls and procedures to implement and monitor the investment management process. Accountability and suitability rules for persons performing investment management are stated Quantitative investment limit (maximum) rules might be derived from the prudential principles : –Using lists of admitted or recommended assets, diversification, dispersion, and maturity and risk management, and also regulated and standardized products, and investment abroad –Quantitative limits should be regularly assessed and amended Pension fund assets should be valued for accounting, reporting, actuarial purposes with consistent rules.

Lessons Disclosure: returns and expenses Objective of investment Governance and investment