S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Public Pension Funds■■Operating and financial performance: the basisfor establishing funding objectives, performancegoals, and financial targets; andDetermination of funding requirements and actuarialassumptions.Pension Fund ManagementA key factor of Standard & Poor’s public pensionfund rating process is assessing the execution of thefund’s management in the context of the fund’sindependence, and operating and financial performance.An assessment of fund management is derivedfrom understanding managerial techniques; fundingobjectives, investment objectives, and risk aversionstrategies, document analysis comprises the balance.Although management has little control over theability of the sponsor to make contributions oremployee retirement benefit modifications, managingits operations and finances in a prudent mannerare factors over which the fund can exert significantinfluence. It is important to note that the assessmentsof pension fund management and independencego hand in hand.Standard & Poor’s public pension fund managementassessment guidelines borrow heavily from itsexisting life insurance and fund rating criteria, andseek to determine whether a pension fund is maintainingtransparent and thoroughly planned managerialand risk acceptance policies, while simultaneouslygenerating sufficient returns to fund its currentand future benefit obligations.Areas of focus for a review of managementincludes the pension fund’s:■ Organization;■ Operational effectiveness; and■ Financial risk management.OrganizationStandard & Poor’s considers strong organization asbeing essential to effectively managing a public pensionfund, and the fund’s management experiencemust support the operational strategy to producethe desired results of maximizing asset growth andincome, within the specified risk tolerance. Whenanalyzing organization, Standard & Poor’s will, forinstance, determine whether the fund maintainstransparent operating principles and controls, aswell, as a sound organizational structure. Issues toconsider include:■ How old is the fund and how is the fundorganized?■ What are management’s goals and how arestrategies developed?■ How large is the pension fund in terms of staffand function, and what is the role of the boardof directors and government sponsor(s)?■ How involved is the board of directors in themanagement of the pension fund, including a discussionof committees such as audit and financescommittees;■ Are written policies and procedures communicatedto fund staff and signed by staff annually (i.e.a Code of Ethics)?■ Do investment managers possess a proven trackrecord, what is that track record, and how closelyare they monitored?■ What type of internal audit controls does thefund adhere to?Operational effectivenessOperational effectiveness involves assessing a pensionfund’s ability to execute chosen funding andoperating objectives and follow through with actualperformance. Standard & Poor’s also evaluates management’sexpertise and understanding in terms ofoperating the fund and managing investments. Anassessment of the adequacy of audit and control systemsis essential. Standard & Poor’s must evaluatewhether the strategies and objectives managementhas chosen are consistent with the fund’s capabilitiesand principles. Furthermore, public pension fundsoften employ private financial firms to assist withinvestments and operations, and a review of thepolicies and strategies governing these relationshipsis imperative. Issues to consider include:■ What are the fund’s specific operating and financialgoals or targets, and how has the fund performedcompared with these goals?■ Does management maintain any form of operatingand/or strategic forecasts that are tied tofuture retiree benefit payments or other anticipatedliabilities?■ Does management maintain any form ofcontingency planning?Financial risk managementA major component of the review of a pensionfund’s financial risk management is the investmentdecision-making process, as asset quality andinvestment performance are integral to a fund’soperations and solvency. Numerous investmentdecisions are made frequently for invested funds,and Standard & Poor’s examines how these decisionsare made and who is responsible for executingthem. Evaluating financial risk acceptanceallows Standard & Poor’s to understand management’sviews on financial goals, asset structure,and board oversight.Standard & Poor’s analysis begins with a comprehensivereview of the pension fund’s permittedinvestment guidelines, asset allocation strategy, andrisk management policies. The ultimate responsibilitywww.standardandpoors.com331