Pension governance is the system of structures and processes implemented to ensure both the compliance with laws and the effective and efficient administration and investment of the pension plan and fund. Sound pension governance is an obvious goal of any pension administrator. Of course, the governance structure that is appropriate for a given organization will vary depending upon factors such as the size of the organization, who the administrator is, the nature of the plan, whether there is a pension committee, etc.
Governance guidelines generally provide broad statements of principle. The Canadian Association of Pension Supervisory Authorities’ (CAPSA)Pension Plan Governance Guidelines, which should be adhered to by any administrator, provide for 11 principles of good governance. But there are five key pension governance considerations that need to be made if pension governance is to be carried out according to plan: who is responsible for what; how is performance measured; information access; risk management/conflicts; and review and update.
WHO IS RESPONSIBLE FOR WHAT?
As the administrator is responsible for compliance withapplicable laws, they must ensure that they keep abreast of the current state of the legislation, any administrative policies of governing bodies and any recent case law that may affect the administration of the pension plan.
Proper governance involves setting out and documenting the various roles and responsibilities of all the participants in the administration of the pension plan. This can be done in the form of a matrix outlining the various participants and their respective roles and responsibilities.
It is important for the administrator to allocate responsibility for all components of the pension governance process and for each party to understand the responsibilities allocated to them. The administrator must also ensure that any person involved in the administration or investment of the pension plan or fund has(or acquires)the knowledge and skills appropriate for his or her role.
With respect to allocation of responsibilities, administrators should consider the following:
HOW IS PERFORMANCE MEASURED?
Once the administrator has identified and documented the governance objectives for the pension plan, they should follow up on a pre-set, regular basis to ensure that the established objectives are being met and determine whether the objectives need to be modified.
With respect to the participants in the governance process, the administrator should clearly set out performance measures to assess them, which will vary depending upon the specific participant. There needs to be ongoing monitoring of the performance of the participants by the administrator; if performance is not meeting expectations, the administrator needs to have in place a system for training, educating or otherwise correcting inadequate performance.
ACCESS TO INFORMATION
Consistent with the case law regarding member communications, any communications should be clear, accurate and understandable by the intended recipients. This disclosure would include anything required under applicable pension laws. In addition, the CAPSA Guidelines suggest appropriate disclosure to members regarding the benefits, risks and responsibilities of membership in the plan. It’s a good idea to augment communication required under applicable pension laws as well through:
In terms of oral communication to members, which also must be accurate and clear, it may be appropriate to designate one (or more, depending on the size of the organization)individual who is responsible for oral communications to members regarding the pension plan. In this way, the administrator can ensure that the person who will be providing information to members has had adequate training and education and is kept informed of regulatory and plan changes. This will help to ensure that consistent and accurate information is provided to members.
It is also important that the plan administrator and any delegates have access to any relevant information required in the administration and investment of the pension plan and fund. In this regard, it is crucial that there are adequate communication channels established among the participants in the governance process so they can properly perform their responsibilities.
An internal code of conduct and conflicts of interest policy should also be established and communicated to all interested parties. These policies will generally apply to the administrator as well as any delegates. The conflicts of interest policy should clearly set out what must be done where a conflict of interest arises. In the pension context, conflicts of interest will often arise where the plan sponsor is also the administrator. The conflicts policy may specifically address this type of issue and set out how the party is expected to operate.
For example, it may require the party to identify and document the roles and responsibilities, legal, fiduciary and otherwise, associated with each role and how decisions are ultimately made. Disclosure to certain interested parties may also be mandated under the policy. The conflicts policy may also require the party to seek independent advice on the issue.
REVIEW AND UPDATE
The best place to start in reviewing and improving a plan’s governance is an overall audit of the current state of affairs. In order to ensure that the review is impartial, the administrator may wish to employ independent professional advice. Unfortunately, once new practices and policies are implemented, the governance job is not complete. Instead, they must be regularly monitored, assessed and updated, when required.
Good pension plan governance is a far cry from the theoretical parameters put forth by regulators. Instead, the CAPSA guidelines should be a guide to an all-encompassing process that involves rigorous monitoring—and ultimately reward.
Jana Steele is an attorney with Goodmans LLP in Toronto. firstname.lastname@example.org