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© Copyright 2000 Rogers Media. The following article first appeared in the April 2001 edition of
BENEFITS CANADA magazine.
A question of duty
Pension management is serious business. So why aren't more committee members better equipped to
carry out their fiduciary duties?
By Dian Cohen
A lot of people have had experience with it, and they're willing to talk, but certainly not on the record. No,
the topic isn't erectile dysfunction, but the competence of pension committees and trustees to oversee the
assets that will become the retirement income of pension plan members.
The half dozen managers in a position to evaluate the overseers that I spoke with share similar
observations--notably that the distinct difference in the competence of trustees lies with their work
experience.
In particular, in jointly trusteed and multi-employer plans, public sector and unionized representatives
seem to be less able to carry out their fiduciary responsibilities than people who have not had a career on
the labour side of the equation.
The deficiency does not lie in an innate inability to understand the principles of investing, but rather in
the fact that these particular board and committee appointments are governed by political or ideological
considerations.
If seniority, for example, governs the appointment of a fiduciary oversight position, only whimsy will
ensure that the individual in question has some financial background. These practices also make it
difficult to ensure the effectiveness of the board.
GOOD OLD DAYS
Years ago, when I was a founding member of a brand new jointly trusteed plan, the plan sponsor took nothing
for granted. The organization arranged education seminars with outside consultants who taught us the
ropes--pension governance, financing, asset classes, investment philosophies for managing both asset mix
and security selection, as well as the essential tasks of board members.
This indepth educational opportunity is not readily available across the board today. There are no
mechanisms in the system to ensure that overseers are equipped to fulfil their fiduciary responsibilities.
Having said that, several corporate boards which I'm on do hold regular and ongoing education sessions.
Clearly, pension management and even oversight is just too complex to leave to amateurs--no matter how
efficiently they may manage their own financial affairs. And if pension committee members and trustees
aren't able to manage their own financial affairs, how can these individuals be expected to oversee the
management of other people's funds?
LOOKING FOR SOLUTIONS
Powerful pension regulatory groups have created a corporate governance guide for the industry and a
self-assessment questionnaire for every corporation with a pension plan. But both of these are voluntary
and proprietary programs, and because of this, they are of little use in ascertaining the competency of
trustees to actually oversee. This is obviously not the best situation.
Safe investments, such as government bonds, are becoming more constrained as national debts and deficits
are addressed and interest rates decline. As a result, pension managers have little choice but to turn
increasingly to equity markets for the returns they need to fund their pension promises.
In a rapidly moving global environment, understanding what makes corporate share prices rise, what enhances
value, how corporations account for that value and the optimum asset mix for the particular needs of plan
members is more critical than ever before. One resource that provides pension committee members with an
overview of their responsibilities is The Portable Pension Fiduciary by John Ilkiw, published by
BENEFITS CANADA.
I was recently asked by a financial regulator to complete a questionnaire detailing my business skills that
would qualify me to sit on the board of a small-cap retail outlet. I didn't think the questionnaire was
marvellously conceived, and I have no idea how the regulator would judge my qualifications.
The exercise of completing the survey did, however, do wonders for putting into perspective what I need to
know to do my own due diligence. Everyone who has fiduciary responsibility over someone else's money should
have to do the same.
Dian Cohen is an economics consultant with a special interest in pension issues.
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