The pension committee plays an integral role in the administration and management of a pension plan. In today’s uncertain economic environment, pension plan risks and management practices are coming under greater scrutiny than ever. Not a week goes by without pension problems being highlighted in the press.
As plan members, plan sponsors and government policy-makers all put pensions under the magnifying glass, pension committees need to be equipped to address current problems, anticipate future risks and act decisively.
This article provides an overview of best practices for pension committee management and strategies that can help a pension committee do its job more effectively. In a broader context, the same best practices apply equally well to non-pension retirement programs, such as group RRSPs and deferred profit sharing plans.
Pension Committee Mandate and Structure
The first step in empowering a pension committee to operate effectively is to ensure that its structure, and the roles and responsibilities of its members and others who are involved in managing the plan, are clearly defined.
At the highest level, the parties responsible for pension plan governance have two overarching duties:
1. to ensure that the plan is established and administered in compliance with all applicable laws; and
2. to ensure that the plan is funded and administered to meet its obligations to members and beneficiaries.
In some organizations, the line of sight to these duties can become blurred when roles and responsibilities are not clearly differentiated. For a pension committee to operate effectively, it is imperative to understand, define and document the differing roles of the plan sponsor, plan administrator, delegates, agents, advisors and members. Where possible, the plan sponsor and plan administrator duties should be split. And, where certain board or administrator responsibilities are delegated to a pension committee, the mandate of the committee must be stated clearly.
Committee composition plays an important role in determining committee effectiveness. A Towers Perrin survey, Emerging Trends and Directions in Pension Governance (focused primarily on private sector entities not using a jointly trusteed governance model), reveals that in addition to the usual HR, finance/treasury and legal representatives, some committees are structured to bring a range of business and plan member perspectives to the table. These perspectives can include line of business or geographic business heads (30% of the plan sponsors surveyed); the company CEO or president (26%); and non-management employee representatives (21%).
In particular, employers are increasingly recognizing that employee participation on pension committees offers an opportunity to enhance the transparency of the plan’s governance processes. Doing so opens up channels of communication and helps to build trust and secure buy-in from plan members when plan design, investment or communication changes must be made.
Employees can participate as members of the pension committee or through a separate advisory committee that provides input and feedback but does not have decision-making powers. For some employers, though, employee participation can pose challenges—for example, if there is a risk that the pension committee could become a forum for airing disputes between the plan sponsor and members or union representatives.
In Quebec, pension legislation mandates member representation on a registered pension plan’s pension committee and sets out specific powers and responsibilities for the committee.
Notwithstanding the legislative framework, the best practice ideas highlighted in this article apply equally to Quebec-legislated committees and other pension committees in Canada.
Emerging best practices include the following:
• adopting clear criteria for the selection and appointment of committee members with the right expertise;
• strengthening reporting channels between the committee and other parties;
• establishing a code of conduct and conflict of interest policy for committee members; and
• in multinational companies, instituting global oversight of plans and codifying global pension governance guidelines and committee objectives.
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Training Committee Members
The education of committee members is vital to ensure that they have the necessary skills and training to fulfill their roles. In many organizations, some members of the pension committee will deal with pension issues only through the committee meetings, so ongoing training becomes essential.
Research by Towers Perrin has found that half of the plan sponsors surveyed provide ongoing training to committee members on pension basics (which includes plan design principles, the regulatory framework, and funding and accounting policies) as well as investment basics (including asset allocation, investment manager selection and ongoing performance assessment). Additionally, 39% provide education to committee members on governance principles, risk management principles, and compliance with regulatory requirements and guidelines.
Emerging best practices include holding mandatory orientation training for new committee members and establishing clear policies for the ongoing continuing education of existing members.