Since that time, corporate and pension governance has been probed, prodded and dissected extensively. But although corporate and pension governance have many elements in common, they are sufficiently distinct that remedies designed for one will not work in the other. While this many be obvious to industry veterans, newcomers, whether they are directors on pension committees, trustees or service providers, often do not make this distinction.
WHAT HAS WORKED?
Effective governance is not just about adopting a bunch of policies or ticking a page of compliance boxes. It requires, in addition to adopting proper policies, the consistent exercise of effective behaviours.
The key challenges are two-fold. The first is whether the pension committee(board of directors or board of trustees) is a lay board or an expert board in so far as pension matters are concerned. What this means is that the board, as a whole, has sufficient expertise in the key areas or can delegate decisionmaking authority to experts.
One also needs to be aware of the perspective of employee groups who are members of boards of trustees; they often see membership on a board as fulfilling a role of being a representative of their constituents. As a result, this process often has a higher priority than any need for latent technical expertise.
Closely related to this is the criteria used to select members of pension committees or boards of trustees. This ties in to where one lies on the layexpert spectrum. The plan sponsor(s) need to determine if certain skills are a pre-requisite for selection or could be acquired after appointment.
As a generalization, an expert board would tend to look at certain skills such as eligibility criteria, whereas a lay board would focus more on skill development following appointment. In this regard, three questions are key and need to be addressed before an individual is appointed. These are:
1. What training should each appointee receive and in what areas should an expertise be demonstrated?
2. Over what time period should this training be given or expertise demonstrated?
3. What are the consequences if training is not undertaken or required expertise is not demonstrated.
It may be that there are no consequences— appointees are allowed to complete their term—but everyone should be made aware of this beforehand.
The second challenge, and probably the more important of the two is the role of the pension committee or board of trustees. There are essentially three levels of responsibility are: governance, management, and operation. The approval of policies and strategies, level of delegation to staff and focus on monitoring increases as one moves from an operational orientation to a governing role. Overall effectiveness increases as a board moves from an operating to a policy mode.
Now that there is no excuse for a lack of awareness concerning governance, a combination of common sense, prudence and the desire to protect the security of the pension promise, particularly if a fiduciary or trustee is also a plan member, may end up being the most effective prescription for effective pension plan governance.
Paul Owens is the plan manager and chief executive officer of the Colleges of Applies Arts & Technology Pension Plan in Toronto. Powens@caatpension.on.ca