PARIS - The Organization for Economic Co-Operation and Development is pursuing a wide-ranging examination of rules affecting pension investments, money managers, capital markets and the development of private pension systems.
In a series of new initiatives, the highly influential intergovernmental body is examining:
*Investment rules that keep pension funds from maximizing returns and inhibit development of capital markets.
*Rules that limit money managers' and mutual funds' access to foreign markets.
*Corporate governance activity by institutional investors and the market for corporate control.
*How private pensions are regulated, what their role is in retirement income security and how they influence the development of capital markets.
The private pension examination is expected to be completed by mid-1998; the financial services issues should be wrapped up earlier.
As a result of the studies, the OECD's codes affecting financial services - to which its 29 member states subscribe - could be revised. But John Thompson, head of the financial affairs division studying the first three issues, noted it's too early to predict what might happen.
Still, the mere fact that the OECD is probing these issues is significant.
A move by the OECD to seek liberalization of financial rules could spur countries to lift international investment barriers.
(Separately, the Brussels-based European Commission plans to release early next year a paper seeking relaxation of investment restrictions among European Union member states. The EC's statement will be a green paper, a concept paper seeking public comment. It is expected to continue the commission's efforts to remove restraints on cross-border and equity investments originally included in the body's abandoned pensions directive.)
In a Nov. 25 meeting in the OECD's basement conference room in Paris, about 100 worldwide representatives convened to respond to an OECD discussion paper highlighting restrictive practices affecting pension funds and money managers.
The paper, which was obtained by Pensions & Investments, clearly shows the directions OECD officials are considering.
The meeting represents the organization's "first attempt in a number of years to re-examine the progress that has been made in OECD countries on eliminating obstacles to trade in financial services and to identify those remaining obstacles," the paper said.
The OECD asked participants how it should proceed, and whether it should publish its findings as a progress report or should consider amending its financial services guidelines. The OECD has published codes on liberalization of capital movements and on investment services designed to remove discriminatory barriers to cross-border activities.
In addition, the paper asked whether the OECD should pursue market access issues with non-OECD countries in Asia, Latin America and formerly centrally planned economies.
While the OECD previously had attacked explicitly restrictive measures, OECD officials now are asking whether "non-discriminatory" institutional barriers "constitute serious impediments to international business," the paper said.
In particular, investment rules designed to ensure pension fund solvency might create obstacles, the paper said.
*German pension funds are permitted to invest up to 20% of total assets abroad. A separate limit of 30% of applies to EU stocks, while another 6% can be invested in non-EU equities and a maximum of 25% can be invested in EU property. "These rules seem unduly constraining given that these externally funded plans must be indexed to the rate of inflation," the paper said.
*Switzerland has a multitiered system of regulation, including a 30% cap on foreign investment.
*Austria requires at least 50% of pension assets be invested in bank deposits or schilling-denominated bonds. "In practice, this means that funds are required to invest in government bonds because of the relatively small domestic bond market," the paper said.
"Whatever the reasons for these investment or behavioral rules, it can be presumed that constraints on the composition of pension fund portfolios inhibit the development of deep and liquid equity markets, may starve the many private commercial enterprises of needed equity funding, and generally inhibit competitive financial market behavior," the paper said.
"Furthermore, pension fund investment rules in some countries implicitly provide a cheap and easy source of funding for governments and the larger corporations," the paper added. Such rules likely harm portfolio returns, thus putting funds at risk or increasing funding costs, while impeding optimal allocation of capital worldwide, it said.
Sources said representatives both defended their nations' retirement systems and then said changes were expected.
For example, the BVI Bundesverband Deutscher Investment-Gesellschaften e.V., Frankfurt, Germany's association of investment companies, has proposed creating a type of defined contribution system that would require equity investments between 30.1% and 80% of assets.
However, sources are not sure whether the BVI proposal will be adopted, given employers' traditional use of book-reserving as a cheap source of corporate finance.
Also, the Belgian government has proposed eliminating a minimum 15% investment in government bonds, but the Legislature has not yet acted on the proposal.
In addition, OECD officials also are studying barriers to market penetration by foreign-based money managers and mutual funds. U.S. and U.K. money managers in particular have complained about lack of access to various markets. For institutional accounts, investment regulations could restrict access, while the ability to freely solicit domestic investors is critical on the retail side, the paper said.
Other issues limit ability of mutual funds to penetrate local markets. Rules affecting withholding taxes on dividends paid to foreigners, different accounting systems, problems in settling trades, and differences in performance measurement methods can inhibit international portfolio management, the paper said.