Global pension systems are in dire need of reform in order to alleviate the global financial crisis, according to the Network of Sustainable Financial Markets.

A report published by the group, Modernising Pension Fund Legal Standards for the 21st Century, carries a six point plan for reform, and argues that it is time for governments working on a redesign of the global financial systems to look at the thus far neglected issue of pension reform.

"Pension funds have been encouraged to operate using narrow and self-destructive interpretations of fiduciary duty stuck in a mid-20th century view of the economy; trustees are required to act like other institutional investors and pursue copycat investment strategies," said Keith Johnson, program director for the International Corporate Governance Initiative at the University of Wisconsin Law School, and co-author of the report.

Pension funds need to stop 'self-destructive' practicesHe said this has amplified natural investor 'herding' behaviour around similar investment practices, leading to a pension fund obsession with short-term investment strategies.

"Research shows there is industry-wide pressure from pension funds and other institutional investors on corporate managers to deliver short-term investment results. This pressure has become so strong that nearly 80 per cent of corporate managers say they would sacrifice future economic value to manage short-term earnings and meet investor expectations.

"This is an incredibly destructive force and has contributed directly to the collapse of financial markets, as financial institutions and operating companies take on excess leverage and engage in financial engineering to meet short-term revenue expectation."

He added that this results in "lemming-like behaviour" by pension funds, and exaggerates market volatility and has an effect on the financial health of corporations.

The report features six immediate changes that are recommended to pension systems, in regulatory interpretation of fiduciary duty, changing investment manager incentive structures, making cost structures more transparent, and actively promoting best fund governance practices.

- Pensions Age February 2009

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