■Operating and financial performance: the basis
for establishing funding objectives, performance
goals, and financial targets; and
■Determination of funding requirements and actu-
arial assumptions.
Pension Fund Management
A key factor of Standard & Poor’s public pension
fund rating process is assessing the execution of the
fund’s management in the context of the fund’s
independence, and operating and financial perform-
ance. An assessment of fund management is derived
from understanding managerial techniques; funding
objectives, investment objectives, and risk aversion
strategies, document analysis comprises the balance.
Although management has little control over the
ability of the sponsor to make contributions or
employee retirement benefit modifications, manag-
ing its operations and finances in a prudent manner
are factors over which the fund can exert significant
influence. It is important to note that the assess-
ments of pension fund management and independ-
ence go hand in hand.
Standard & Poor’s public pension fund manage-
ment assessment guidelines borrow heavily from its
existing life insurance and fund rating criteria, and
seek to determine whether a pension fund is main-
taining transparent and thoroughly planned mana-
gerial and risk acceptance policies, while simultane-
ously generating sufficient returns to fund its cur-
rent and future benefit obligations.
Areas of focus for a review of management
includes the pension fund’s:
■Organization;
■Operational effectiveness; and
■Financial risk management.
Organization
Standard & Poor’s considers strong organization as
being essential to effectively managing a public pen-
sion fund, and the fund’s management experience
must support the operational strategy to produce
the desired results of maximizing asset growth and
income, within the specified risk tolerance. When
analyzing organization, Standard & Poor’s will, for
instance, determine whether the fund maintains
transparent operating principles and controls, as
well, as a sound organizational structure. Issues to
consider include:
■How old is the fund and how is the fund
organized?
■What are management’s goals and how are
strategies developed?
■How large is the pension fund in terms of staff
and function, and what is the role of the board
of directors and government sponsor(s)?
■How involved is the board of directors in the
management of the pension fund, including a dis-
cussion of committees such as audit and finances
committees;
■Are written policies and procedures communicat-
ed to fund staff and signed by staff annually (i.e.
a Code of Ethics)?
■Do investment managers possess a proven track
record, what is that track record, and how close-
ly are they monitored?
■What type of internal audit controls does the
fund adhere to?
Operational effectiveness
Operational effectiveness involves assessing a pen-
sion fund’s ability to execute chosen funding and
operating objectives and follow through with actual
performance. Standard & Poor’s also evaluates man-
agement’s expertise and understanding in terms of
operating the fund and managing investments. An
assessment of the adequacy of audit and control sys-
tems is essential. Standard & Poor’s must evaluate
whether the strategies and objectives management
has chosen are consistent with the fund’s capabilities
and principles. Furthermore, public pension funds
often employ private financial firms to assist with
investments and operations, and a review of the
policies and strategies governing these relationships
is imperative. Issues to consider include:
■What are the fund’s specific operating and finan-
cial goals or targets, and how has the fund per-
formed compared with these goals?
■Does management maintain any form of operat-
ing and/or strategic forecasts that are tied to
future retiree benefit payments or other anticipat-
ed liabilities?
■Does management maintain any form of
contingency planning?
Financial risk management
A major component of the review of a pension
fund’s financial risk management is the investment
decision-making process, as asset quality and
investment performance are integral to a fund’s
operations and solvency. Numerous investment
decisions are made frequently for invested funds,
and Standard & Poor’s examines how these deci-
sions are made and who is responsible for execut-
ing them. Evaluating financial risk acceptance
allows Standard & Poor’s to understand manage-
ment’s views on financial goals, asset structure,
and board oversight.
Standard & Poor’s analysis begins with a compre-
hensive review of the pension fund’s permitted
investment guidelines, asset allocation strategy, and
risk management policies. The ultimate responsibilityhttp://www.standardandpoors.com 331Public Pension Funds