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

Other Criteriafor any pension fund typically lies with its board ofdirectors or trustees, and board members are usuallyelected and/or appointed to oversee the fund’s investmentsand management. Boards entrust staff andinvestment managers with handling the fund’s dayto-dayaffairs, and policies are typically establishedthat delineate management’s tolerance for risk.Boards must establish effective procedures forreviewing and enforcing these policies.Standard & Poor’s expects public pension fundsto maintain detailed policies documenting theamount, type, and quality of information used inmaking investment, asset allocation, and risk managementdecisions. This includes the size, breadthof understanding, and capabilities of the credit andrisk research staff, as well as access to current economicdata and analysis. Once investment and riskmanagement strategies are understood, Standard &Poor’s reviews the pension fund’s allocation ofassets among investments such as fixed income,domestic and international equities, real estate, andother invested assets. The assets are evaluated forcredit quality and diversification. Asset concentrationsby type and maturity, credit quality, industry,geographic location, and within single issuers areevaluated.The pension fund’s asset allocation is also examinedto determine liquidity in relation to its liabilities.Standard & Poor’s reviews the portfolio’s liquiditybecause the fund may need to liquidate assetsquickly to pay liabilities such as capital calls, guarantees,or credit enhancement programs. Issues toconsider include:■ Is there a defined risk management process inplace to ensure that assets are managed withintheir objectives and established risk parameters?■ Does the fund have predetermined limits foracceptable levels of risk, and are these guidelinesdetailed or general?■ What policies are in place for investments ortrading by investment managers and how arethey monitored?Pension Fund Operating And Financial ConsiderationsObligations and expendituresPension fund liabilities are derived from the retireebenefits incurred as a result of sponsor governmentPublic Pension Fund Evaluation: Fund ManagementStrong Adequate WeakManagement maintains a clear and Management generally follows a basic Management does not maintain or follow a basiccomprehensive 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 implementationobjectives, 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/orextensive and transparent.are ignored.Management has considerable expertise, Management lacks expertise, depth, and Management lacks ability to understand anddepth, and breadth, and is engaged in, and breadth, but maintains good control over control its operations.has demonstrated an ability to exerciseits operations.strong control over its operations.Strategies and objectives chosen are Strategies and objectives include some Strategies and objectives include manyconsistent with the fund’s capabilities contradictions with the fund’s capabilities contradictions with the fund’s capabilities andand 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 forand 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, assetasset allocation, and risk acceptance asset allocation, and risk acceptance allocation, and risk acceptance policies andstandards 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 riskacceptance 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.332 Standard & Poor’s Public Finance Criteria 2007