The first two parts of this series explored the first 10 principles of the Canadian Association of Pension Supervisory Authorities’ guidelines on pension governance. As a principles-based framework, the guidelines lay out what to strive for, leaving the how up to plan administrators.

The final instalment in this series looks at the 11th principle, which recommends that plan administrators establish and document a process to regularly review the plan’s governance framework and processes. Since the governance review criteria tie together the principles covered so far, this final principle deserves some extra attention.

Read: Tips for meeting CAPSA’s pension governance guidelines

Read: Tips for meeting CAPSA’s pension governance guidelines: Part II

These reviews are important, heightened in today’s environment of increased regulation around pension governance. In Alberta and British Columbia, legislation now requires plan administrators to conduct written triennial assessments of their plan’s administration, covering the governance, among other things. Further, pension regulators are conducting their own reviews of plans under their supervision. In fact, one of the federal regulator’s recurring areas of concern, according to its May 2018 newsletter, is that not all plan administrators are performing self-assessments.

The Financial Services Commission of Ontario previously stated it intends to examine every registered pension plan in the province within a five-year period. In 2017, it conducted 112 risk-based desk reviews and 60 on-site examinations as part of this initiative. The regulator’s standard practice is to detail any identified deficiencies in a formal letter addressed to the organization. Parties responsible for overseeing their organization’s pension plan may wish to proactively review their plan and correct any issues before the regulator comes knocking.

A plan’s governance policy document should outline the governance review process and address the following: the parties responsible for conducting the review; the review procedures; the examination criteria; and the frequency of the reviews. A formal review process provides plan administrators with a mechanism for ensuring the plan’s governance meets stakeholder expectations and industry best practices on an ongoing basis.

Read: What to do when FSCO comes knocking on a plan sponsor’s door

The review methodology is ultimately up to the plan administrator. This may seem daunting, but plan administrators wondering where to begin should keep in mind the purpose of the governance framework and processes: to enable the plan administrator to discharge its fiduciary responsibilities. An effective governance review’s primary objective is to assess how effective the governance framework is at accomplishing this purpose.

Determining the scope of the review and the questions it strives to answer is typically the first step. The CAPSA has published a self-assessment questionnaire as a helpful tool with respect to the latter point. However, plan administrators may wish to adapt the questionnaire or develop customized evaluation criteria to the specific needs of their own plan(s).

For instance, it might be interesting to know not only how a plan stacks up versus industry best practices, but also how effectively the existing framework is being executed. The overall scope of the exercise can also go beyond governance to take a deeper look at administrative issues by testing for common pitfalls and compliance with applicable legislation. Plan administrators can conduct the exercise themselves or seek an objective assessment from an independent third party for an outside perspective.

Read: Top 50 DC Plans Report: A look at the latest governance trends

Feedback from the pension regulators on their supervisory activities also offers potential areas of focus for the exercise. In 2016, B.C.’s regulator provided a voluntary self-assessment questionnaire to all plans registered in the province. Its findings were published in an August 2017 report, which indicated that plan administrators were not confident that they: had identified and prioritized the financial and governance risks to their pension plan; had processes in place to improve the learning of individuals involved in the plan’s administration; or were providing appropriate informational tools to members.

Beyond a lack of self-assessments previously noted, the federal regulator also observed that governance documents and meeting minutes weren’t sufficiently detailed, investment policies weren’t being reviewed and there was a lack of formal reporting to the board of directors or trustees pertaining to the operation of the plan. These issues transcend regulatory jurisdictions and are important to all plans.

The review process itself often entails examining the plan’s key documentation and interviewing stakeholders. A thorough assessment requires input from the plan’s various governance participants. Engaging decision-makers individually, as opposed to in a group, can provide additional insight where it reveals differing beliefs or opinions across participants while also minimizing the effects of social influences or groupthink. People may have a different perspective or understanding on how things work based on their individual role or experiences. The interview stage is one area where plans stand to benefit from outside help as people are sometimes more comfortable providing candid responses to independent examiners.

Read: Regulators turning their attention to DC plan rules

Following the information gathering steps, it’s good practice to document the results of the assessment in a report format. This will serve as a benchmark for future reviews and help with developing an action plan to address any shortfalls or potential areas of improvement. Some recommended actions will be higher priority than others and some will require greater time and effort to implement. Organizations should develop a timeline for working through the action plan accordingly and dedicate time to regular meeting agendas to monitoring the ongoing progress.

Regular reviews are a demanding but necessary part of a well-functioning governance framework. Plans are constantly transforming — through design changes, organic growth in assets or membership, mergers and acquisitions, increasingly complex investment portfolios and turnover of personnel – and the governance oversight needs to keep up. Undergoing a full-scale assessment every year isn’t practical, but every three years or so, as mandated in some jurisdictions, is manageable. Minor checkups between reviews can help ensure everything remains on track. Remember, good governance is always a work in progress and a continual evolution.

Michael Scott is a consultant at Proteus, a Toronto-based investment and governance specialty firm. These are the views of the author and not necessarily those of Benefits Canada.
Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

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