# **1. Introduction and Summary of Findings**

## **1.1 Introduction**

Public pension funds operate in many countries with very small reserves, covering pension payments for up to one year ahead. However, there is also a large number of both high income and developing countries where public pension schemes are partially funded and have accumulated significant reserves.

In general, public pension funds have the potential to benefit from low operating costs because they enjoy economies of scale and avoid large marketing costs. But this important advantage is often dissipated by a poor record on investment performance, caused by a weak governance structure, lack of independence from government interference, and a low level of transparency and public accountability.

Historically, public pension funds were managed poorly in most countries. They were forced to invest in government bonds and housing loans at low nominal interest rates, while investments in foreign assets were prohibited. In countries that suffered from high inflation, real investment returns were negative, while even in countries where nominal interest rates exceeded inflation, the returns on public pension reserves were well below equity market returns and well below the returns achieved by private pension funds.<sup>2</sup> Recognizing the poor track record of public pension funds and the need to build pension reserves to meet the growing demographic pressures on public pension schemes, several OECD countries have in recent years revamped the governance structure and investment management of their public pension funds or have created new funds that have benefited from a strong governance structure, independence from government, and a high level of transparency and public accountability.

This paper reviews the experience of four such OECD countries: Norway, Canada, Ireland and New Zealand. The paper is divided into 5 chapters. Chapters 2 to 5 discuss in some detail the experience of public pension funds in each of these four countries, reflecting the order in which they were set up. This first chapter provides an overview and summary of findings. After a brief synopsis of the past record of the investment performance of public pension funds, the chapter discusses the creation of new public pension funds, and then reviews their structure and performance in terms of their objectives, funding sources, institutional structure and fund governance, executive management, formulation of investment policy objectives and determination of strategic asset allocation, implementation of investment strategy and, last but by no means least, investment performance. The chapter ends with some concluding remarks and a brief summary of the main lessons for both high income and developing countries that may wish to create similarly organized public pension funds.

> 2 The poor performance of public pension funds has been documented in many studies. For a summary overview, see World Bank (1994), while for more detailed studies of public pension fund governance and performance see Mitchell and Hsin (1997), Iglesias and Palacios (2000), Useem and Mitchell (2000), Hess and Impavido (2004), and  Impavido (2002 and 2007).

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