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© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
Six steps to governance self-assessment
Industry leaders have developed a pension plan report card that encourages sponsors to adopt a
self-regulatory approach to good governance.
BY BRUCE TOLLEFSON
With the goal of fostering self-regulation in the area of pension plan governance, two leading industry
groups, the Association of Canadian Pension Management and the Pension Investment Association of Canada,
joined forces with the Office of the Superintendent of Financial Institutions to release the Report of
the Joint Task Force on Pension Plan Governance this past January.
The report is a response to the call in late 1998 by the Standing Senate Committee on Banking, Trade and
Commerce, chaired by Senator Michael Kirby, urging pension plans to start adopting enhanced governance
practices. The industry report comprises a six-part, self-assessment questionnaire to be completed on an
annual, though voluntary, basis by plan governors. Supporting the questionnaire are six key governance
principles, embodied in earlier guidelines developed independently by task force members.
Recognizing what works for one plan may not work for another, the principles outlined in the report are
broad rather than prescriptive. They are designed to apply to pension plans of all types and sizes--whether
defined benefit, defined contribution, multiple employer, single employer, large, small, public or private.
The report does not dictate best practices, procedures or policies; nor does the questionnaire call for
detailed reporting. Instead, it is intended as a tripwire of sorts. By focusing on the central governance
issues that plan fiduciaries, including boards of directors and pension committees, need to address, the
task force hopes to spur them into action on all fronts. This could well rule out the need for government
regulation--provided enough plans act on the report's recommendations and complete the questionnaire.
Let's take a closer look at the rationale behind each of the six questions and their related principles,
and explore some suggestions on the best way to tackle each one.
Principle 1: Mission. Pension plans should have a clear mission.
The mission statement defines why the plan exists, and facilitates the adoption of measurable goals for
evaluating governance.
Questions: Does the pension plan have a stated mission, and has it been communicated to plan members?
Comments: While it's easy to check off "yes" or "no" here, the key is to understand that the needs the
sponsor wants the plan to address will dictate the types of goals it ultimately adopts. By identifying the
areas important to the sponsor and outlining plan objectives, a well-crafted mission statement will help
sponsors develop and implement measurable goals for each objective.
If, for example, a sponsor wants to encourage greater employee involvement, it might decide to include more
employee representatives on its pension committee. Or, in the case of a company where employee turnover is
high, the plan's mission might be to provide short-term financial security. This would dictate a certain
investment style and a related set of measurable goals.
Principle 2:Fiduciary duty. Pension plan fiduciaries have a primary duty to plan beneficiaries over and
above any other interests.
A code of conduct, including conflict-of-interest policies and procedures covering benefits administration,
funding and investments should be clearly articulated and monitored.
Questions: Does the plan have clearly articulated roles and responsibilities, and are there control
mechanisms in place to protect the plan and its governors and administrators from conflict of interest,
lack of understanding and dishonesty?
Comments: This principle addresses an issue crucial to fiduciaries who frequently find themselves torn
between two opposing perspectives: their dual role as plan fiduciary/administrator and employee of the plan
sponsor. Take the case of a vice-president of human resources or a treasurer who, as an employee, might
want to control pension plan costs but also realizes this would conflict with his or her fiduciary duty to
protect plan members' financial interests.
A good way to separate the two opposing interests, and enable fiduciaries to better meet their obligations,
is to ensure the roles and responsibilities assigned to them are designed to minimize potential conflicts.
For example, a pension committee should avoid assuming responsibility for plan design, leaving that to,
say, the compensation committee. In addition, it should implement policies addressing how to handle issues
such as funding, surpluses and charging of expenses against the plan. Having written job descriptions and a
conflict-of-interest policy in place in the event conflict does arise is an essential element of good
governance.
Principle 3:Responsibilities and accountabilities. Allocate responsibilities and accountabilities clearly.
Governors and administrators should define the responsibilities of each participant in the plan's
governance, management and operations, and clearly identify the stakeholders to whom each party is
accountable.
Questions:Have the parties responsible for legislative compliance, plan funding, asset management, benefit
administration and communication been clearly identified?
Do written terms of reference exist for each of the parties responsible for those functions?
Are the names of governors and day-to-day administrators disclosed to plan members?
Comments: The first two questions address the critical functions essential to a plan's successful
operation. They are aimed at ensuring that all areas (legislative compliance, plan funding, etc.) are being
managed and working properly, and that no gaps or overlaps exist in responsibility. Because benefit
administration, in particular, is commonly overlooked by many governors, they may lack assurance that
issues, which are their responsibility, such as plan member enrolment and timely and accurate benefit
payments, are functioning properly.
The third question addresses the issue of accountability. The task force believes that providing the names
of the people in charge to plan members will lead to greater accountability.
Principle 4:Oversight. Performance should be measured and reported.
Governors can measure performance, including pension administration, funding status and investments,
against pre-defined goals. Results should be reported to the appropriate stakeholders.
Questions: Are there clear and objective performance measures regarding legislative compliance, plan
funding, asset management, benefits administration and communications?
Is there an evaluation and reporting process in place to let stakeholders know whether those measures have
been achieved?
Comments: The focus here is on delivery. Methods of reporting and evaluating how well functions are being
performed must be in place. Otherwise, what assurance is there that a plan is operating effectively? The
task force is convinced that the only way to bring about improvements is by measuring performance against
set goals. For example, standards must be in place to ensure legislative compliance. Similarly, how can a
fiduciary be certain benefits will be paid out unless he or she knows the plan is adequately funded? While
most plans have adopted asset-management objectives, how many can claim to have performance indicators
related to benefits administration or communications?
Reporting results is an essential part of the delegation process, reinforcing the notion of accountability.
In other words, how accountable can someone be for a function if the stakeholders are unaware of how well,
or even whether, goals have been met?
Principle 5: Governor's qualifications. The gov-ernor/pension plan administrator should be qualified and
knowledgeable. Each person involved in plan administration should have, or acquire, knowledge and skills
appropriate for the responsibilities and accountabilities they carry.
Questions: Does the plan have criteria and a process for selecting governors? Are the individuals
responsible for plan governance given training to fulfill their responsibilities?
Comments:In keeping with their mission and philosophical outlook, plan sponsors tend to seek out
prospective governors based on a variety of qualifications. Expertise, reputation, community profile, time,
interest and willingness to learn might all be criteria. These should be carefully weighed and considered
to ensure the committee is able to deliver on the plan's promises to its members.
Determining how much ongoing training will be necessary depends on how well qualified governors are.
Governing and managing a pension plan does, after all, require dealing with a tremendous amount of complex,
ever-changing information concerning investments, benefits administration, legislation, jurisprudence and
governance techniques. Ongoing education and training are paramount to ensuring governors and associated
employees keep abreast of current developments.
Principle 6:Governance self-assessment. The governance process should be reviewed and modified over time to
maximize its effectiveness.
Questions: Are processes and criteria in place to allow the individuals responsible for plan governance to
regularly assess their own and the plan's effectiveness?
Comments: Just like investments and benefits administration, governance performance must be reviewed on a
regular basis. Far from being static, the system needs to be flexible and adaptable if it is to keep pace
with changing circumstances. A good way to bring about worthwhile changes and ensure governance is
functioning as well as it should be is to conduct an annual review, such as the one the self-assessment
questionnaire espouses.
The task force is convinced that if the questionnaire is answered in an honest, forthright and objective
manner, it will support positive changes benefiting both fiduciaries and plan members.
Bruce Tollefson is a manager with KPMG LLP in Toronto. He sat on the plan governance task force.
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