The Organization for Economic Co-operation and Development issued warnings about derivatives in a set of recommendations for pension plans in 30 member countries, including the United States.
"The use of derivatives that involves the possibility of unlimited commitments and, more generally, the use of derivatives for speculative purposes should be prohibited," according to the OECD guidelines on pension fund asset management. However, the guidelines suggested that derivatives "have an increasing place in pension fund portfolios" to reduce investment risks or facilitate efficient portfolio management. Swaps, for example, are often used to better match assets with liabilities among pension plans.
Aimed at standardizing the day-to-day management of the estimated $16 trillion in pension assets of OECD countries, the guidelines also addressed issues such as portfolio limits. For example, the OECD recommends that investments abroad should not be prohibited, provided that the currency matching needs between pension plan assets and liabilities are taken into account, according to the guideline. The OECD also recommended that the market value of the plan's assets and liabilities be disclosed regularly to give trustees early warning of investment underperformance.
OECD spokesman Juan Yermo could not be reach for further comment by press time.