for any pension fund typically lies with its board of
directors or trustees, and board members are usually
elected and/or appointed to oversee the fund’s invest-
ments and management. Boards entrust staff and
investment managers with handling the fund’s day-
to-day affairs, and policies are typically established
that delineate management’s tolerance for risk.
Boards must establish effective procedures for
reviewing and enforcing these policies.
Standard & Poor’s expects public pension funds
to maintain detailed policies documenting the
amount, type, and quality of information used in
making investment, asset allocation, and risk man-
agement decisions. This includes the size, breadth
of understanding, and capabilities of the credit and
risk research staff, as well as access to current eco-
nomic data and analysis. Once investment and risk
management strategies are understood, Standard &
Poor’s reviews the pension fund’s allocation of
assets among investments such as fixed income,
domestic and international equities, real estate, and
other invested assets. The assets are evaluated for
credit quality and diversification. Asset concentra-
tions by type and maturity, credit quality, industry,geographic location, and within single issuers are
evaluated.
The pension fund’s asset allocation is also exam-
ined to determine liquidity in relation to its liabili-
ties. Standard & Poor’s reviews the portfolio’s liq-
uidity because the fund may need to liquidate assets
quickly to pay liabilities such as capital calls, guar-
antees, or credit enhancement programs. Issues to
consider include:
■Is there a defined risk management process in
place to ensure that assets are managed within
their objectives and established risk parameters?
■Does the fund have predetermined limits for
acceptable levels of risk, and are these guidelines
detailed or general?
■What policies are in place for investments or
trading by investment managers and how are
they monitored?Pension Fund Operating And Financial Considerations
Obligations and expenditures
Pension fund liabilities are derived from the retiree
benefits incurred as a result of sponsor government332 Standard & Poor’s Public Finance Criteria 2007Other CriteriaStrong Adequate Weak
Management maintains a clear and Management generally follows a basic Management does not maintain or follow a basic
comprehensive set of operating and set of principles, objectives, set of principles, objectives, and strategies.
funding principles, objectives, and strategies.
and strategies.
Board is independent, highly qualified, Board is independent. Board is not independent and/or is not involved.
and willing to exercise proactive judgment.
Organizational structure fits principles, Organizational structure does not fully Organizational structure impedes implementation
objectives, and strategies. foster principles, objectives, and strategies. of principles, objectives, and strategies.
Audit and control systems are Audit and control systems are average. Audit and control systems are weak and/or
extensive and transparent. are ignored.
Management has considerable expertise, Management lacks expertise, depth, and Management lacks ability to understand and
depth, and breadth, and is engaged in, and breadth, but maintains good control over control its operations.
has demonstrated an ability to exercise its operations.
strong control over its operations.
Strategies and objectives chosen are Strategies and objectives include some Strategies and objectives include many
consistent with the fund’s capabilities contradictions with the fund’s capabilities contradictions with the fund’s capabilities and
and principles. and principles. Achievement of some principles, and many goals appear unattainable.
objectives appears unlikely.
Maintains very conservative operating Has no commitment to maintaining Disregards any reasonable standards for
and financial targets. conservative operating and operating and financial targets.
financial targets.
A set of comprehensive investment, A set of comprehensive investment, Has no defined set of investment, asset
asset allocation, and risk acceptance asset allocation, and risk acceptance allocation, and risk acceptance policies and
standards in place. policies and standards are formally in place.
policies and standards are formally in place. in place.
Investment, asset allocation, and risk Investment, asset allocation, and risk Investment, asset allocation, and risk
acceptance policies are often, but not acceptance policies are not adhered to. acceptance policies are not adhered to.
always, adhered to.
Fund consistently performs well Fund usually performs well against Fund often misses objectives/strategies/targets.
against objectives/strategies/targets. objectives/strategies/targets.
Public Pension Fund Evaluation: Fund Management