In the 1970s, a pension committee appointed to provide oversight for a DB plan might only have met once a year under a simple mandate, often only addressing fund performance review. Now, many plans have more complicated designs, with multiple and complex assets classes that need more frequent and diligent review. Committees now deal with legal and fiduciary concerns, discuss complicated pension matters and meet four to six times per year or more—or should be if they aren’t.
Despite the increasing complexity of the role, there has been little shift in the methods used to select or assign committee members. In many cases, members are chosen based on their role in the organization and may have little or no pension or investment experience.
This approach should raise some concern, given that the composition of a committee has a direct impact on committee behaviour and decision-making. So, what considerations should come into play when selecting members for an effective pension committee today?
Current committee stats
Last year, Aon Hewitt conducted a short survey of Canadian plan sponsors on the topic of pension and investment committee selection practices. The 79 responding firms sponsored at least one employee retirement savings plan and ranged in size from less than $20 million to over $1billion annual revenue, representing a broad range of industries.
Close to 95% of these organizations indicated they have an established pension and/or investment committee for their pension plan(s). Committee size ranged from three to 22 voting members. Almost half of the committees had five or six voting members and about one-third had more than six. The average age of a voting member was 51 years and 70% were male.
Being appointed as a committee member was the second most popular selection method, and being nominated was the next most common. Almost 45% of plans did not set a limit on the term of committee members, although some of these do periodically revisit member appointments.
In cases where plans did set fixed terms, three years was the most common length.
In short, a typical Canadian pension or investment committee is made up of middle-aged males whose membership is due to their role in the organization. These members generally serve for 10 years or more, regardless of attendance or engagement. While many of these committees may be meeting their mandates, it is time for a review of how members are selected in order to improve committee effectiveness in today’s more complex environment.
A move toward effectiveness
The following factors are important in order to establish successful pension/investment committees:
- Documented governance processes and policies. Written policies are key to a well-run plan and should include a summary of committee objectives and member responsibilities. While many plans will already include such documentation, it’s important to review processes and policies periodically.
- A formal selection process. With a defined process in place, committees can ensure that they not only consider all possible candidates, they are evaluated on consistent and relevant criteria.
- Background. One of the criteria would be agreement on necessary and appropriate backgrounds for membership. While a grounding in finance, pensions and investments would undoubtedly be helpful, the focus should ultimately be on establishing a diverse committee.
- Diversity. Research has established that a congruent group, where most or all members are of the same age, gender and beliefs, are less effective, with many members simply supporting one spokesman. With a properly diverse group, there is less likelihood of decisions being made through a “follow the leader” mindset.
Ongoing training
With a well-structured committee, the known benefits of initial training and continuing education are enhanced. All new committee members should participate in an induction training process to ensure they are aware of their fiduciary and other responsibilities. Doing so will enable them to understand the basics of the pension plan they are overseeing, including the promise to members, the investments, and the legislative environment in which the plan exists.
Sponsors want to put the operation of their pension plans in the hands of a committed, engaged investment and/or pension committee. By adopting a modernized, holistic approach to the member selection process the committee will experience increased efficiency and effectiveness in their overall decision-making process, which, in the long run, benefits all stakeholders.
Roz Gilbert, is a vice-president and in the Aon Hewitt’s retirement practice in Vancouver. Sara L. Hakim is a senior consultant and in the firm’s investment practice in Calgary.