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© Copyright 2000 Rogers Media. The following article first appeared in the October 2000 edition of
BENEFITS CANADA magazine.
Getting governance right
The pension plan governance recommendations of a recent industry task force fall short in meeting
the needs of many plans.
By David Howe
Pension plan governance is a hot topic these days. In the wake of the Kirby Report--a document produced by
the Senate Standing Committee on Banking, Trade and Commerce, chaired by Senator Michael Kirby--the
spotlight is on pension plans.
While the committee didn't push the panic button, it did note that there is considerable room for
improvement in the area of pension governance. In particular, it recommends that pension plans adopt
industry best practices when it comes to governance.
The report prompted some plan sponsors to cast their gaze inward and take a closer look at their own
governance structures. It has also resulted in the formation of a joint task force on plan governance, made
up of representatives from the Association of Canadian Pension Management, the Pension Investment
Association of Canada and the Office of the Superintendent of Financial Institutions.
When members of the task force banded together, they had three key objectives in mind. They were:
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To develop a set of governance principles that could be adopted by Canadian pension plans of all types
and sizes.
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To come up with a cost-effective, self-assessment and reporting tool.
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To raise the level of understanding among plan administrators regarding their accountability for
decisions and actions.
On the whole, the recommendations of the task force are a worthy effort. The concept of a self-assessment
tool that provides a checklist of responsibilities and actions is a positive one. Plan sponsors should
welcome such a list. After all, assigning responsibilities and regularly reviewing performance is an
integral part of doing business.
SHORTFALL
However, the recommendations fall short in three key areas:
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The one-size-fits-all approach does not adequately address the differences in plan design and size.
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The implied governance role is not appropriate for many employers with defined contribution (DC)
pension plans.
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Some of the details are inappropriate for smaller, single-employer pension plans.
Regrettably, these shortcomings may lead to a lack of acceptance, particularly by small and medium-sized
plan sponsors. And that, in turn, could hasten the arrival of a legislated solution.
The task force contends that its principles and checklist are suitable for all pension plans. However, with
the exception of a lone paragraph dealing with DC plans, they seem to be tailored for larger, defined
benefit (DB) pension plans with a staff dedicated to administer them.
In the past, the pension landscape was dominated by single- employer DB plans and a handful of large,
multi-employer plans. But today, the terrain is much different.
The single-employer DB plan is an endangered species--except in the case of negotiated plans. Many DB plan
sponsors have converted to DC plans, while others are in the process of doing so. In addition, other
plans--including some of the larger public sector ones--have evolved into jointly administered arrangements
that are governed by boards comprised of both management and employees. Given this new landscape, it's
difficult to see how a one-size-fits-all approach to self-assessment will work.
The task force would have done the industry, regulators and public a greater service if it had addressed
the differences between the various pension arrangements and the impact they have on governance roles and
responsibilities.
THE EMPLOYER'S ROLE
A second concern lies with the implied role of the employer in the governance process. The footnotes to the
self-assessment checklist cite examples of what the task force considers to be key governance
responsibilities.
These include establishing funding policies for the pension plan as well as developing investment policies
and objectives. However, the legislative environment already imposes maximums and minimums on the former,
and standards of practice on the latter.
Rather than implying that good governance encompasses legislated issues, the task force principles should
simply cut to the chase and give greater weight to ensuring a plan is being administered adequately and
operating within the context of the law.
After all, for many DB plans, it's the employer that underwrites the pension promise. This fact is no more
apparent than in the almost universal requirement that plan sponsors make up any shortfall in funds in the
event of a plan wind-up.
Because the onus rests on the employer's shoulders, why burden them with vague governance principles?
MISSION IMPOSSIBLE
A final concern focuses on some of the specific recommendations of the task force.
For instance, footnotes in the report provide examples of funding, asset management and benefit
administration activities. But, once again, these seem to focus on DB plans and fail to distinguish between
the employer's role and the true issues of governance.
The key concern in this area, however, is the report's assertion that every pension plan should have a
"clear mission statement."
Most plan sponsors attend diligently to their pension responsibilities and welcome help in identifying
them. But the reality is, many highly successful businesses don't see any need for a corporate mission
statement, let alone a separate one for their pension plan.
Let's face it, for most employers, the pension plan is only one small part of their business.
While the task force has made an important first step, we're not there yet. We must take pension governance
to the next level.
Plan sponsors need to adopt a governance policy and confirm that they've addressed universal issues. They
also need to confirm that they've addressed issues that are unique to their particular plan and employees.
The check-that-one-off approach to self-assessment recommended by the task force may be attractive to the
bureaucracy, but it's unlikely to achieve the desired result. It simply doesn't address the differences in
plan design, size, structure and employer role. And in many cases, it will lead to compliance in form
rather than substance.
David Howe is a consultant with Toronto-based Eckler Partners Ltd. He currently chairs the worldwide
Employee Benefits Steering Group for Woodrow Milliman. davidhowe@eckler.com.
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