Responsible Investor

Asia’s state pension funds: en route to better governance

Funds in China, Korea and Thailand break ground on voting and corporate accountability, but there are still areas to develop.

As evidence mounts that good management of ESG issues can enhance portfolio value, some Asian pension funds are beginning to give more emphasis to RI methods and to pressure companies in which they invest to demonstrate improved standards of corporate governance. It is still relatively rare to see the government-linked pension and provident funds in Asia exercising their proxy voting rights, but several large state funds, including Korea’s National Pension Corporation (NPC Korea) and the National Social Security Fund in China, are now developing corporate governance guidelines and/or proxy voting policies. Thailand’s Government Pension Fund (GPF Thailand) has already compiled a corporate governance rating system for Thai companies inspired by the OECD Principles for Corporate Governance.
However, a pension fund needs to view governance on two levels: firstly, as a responsible investor that takes account of investee companies’ corporate governance practices; and secondly, for the fund itself, as a fiduciary accountable to its beneficiaries.
In order to ensure organisational credibility, the administration and operation of public pension funds themselves must be conducted with demonstrably high standards of transparency and governance.

Public confidence in the pension system is critical to encouraging public participation, especially where the fund is dependent at least partly on voluntary payments from workers for its inflows – many Asian countries are currently aiming to introduce an element of voluntary contribution into their pension systems. At the extremes, poor oversight can encourage corruption and theft, which in turn adds to under-funding problems in some countries. Generally, inadequate governance may cause confusion, poor decision-making and inefficiencies, which drive up administrative costs and jeopardise investment returns. As Asian pension funds seek to become active investors, poor internal governance also weakens their credibility when they raise corporate governance questions with investee companies.
One of the basic principles of governance is the separation of the governing from the executive function. To establish accountability, there must be a clear focus of liability on a governing body or person, who is in turn accountable to the beneficiaries; and the relationships between trustees, plan sponsor, regulator and government must be clearly established. The governance structure should include an appropriate division of operational and oversight responsibilities, and appropriate control, communication and incentive

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