Short and simply: ‘is the business done properly and seen to be done properly?’ The first principle of good governance is to provide transparency towards the stakeholders – ie the fund’s sponsoring employer and the fund’s beneficiaries. It is the system of governance and regulation and the public perception of work-based pensions that is at stake, and the system must have the confidence of all the stakeholders.
Recent debates on pension fund governance have focused on the contribution that regulatory and governance structures make to the effective performance of the national pension system. Can non-professional governing boards continue to contribute positively to pension governance in an era of, for example, increasing investment complexity and uncertainty, the challenge of funding requirements and continuous regulatory change? The business world is changing and there is an ongoing shift from defined benefit towards defined contribution funds. This presents a major challenge to governments, companies and employees. Pension fund provision, and its governance, must be modernised.
An employer’s reputation, financial results, workforce productivity and industrial relations are all affected by risks associated with providing and operating pension funds. Companies have a responsibility to their shareholders to see that the costs of providing pensions yield business benefits. Pension funds are subject to considerable external and regulatory scrutiny, which can have a profound long-term impact on a company’s pension obligations. As a result, there are calls for stronger and more effective pension fund governance and practices.
While many regulatory guidelines mainly focus on prudent supervision, they raise new issues, including the need for balanced representation of stakeholders in governance structures, greater expertise and knowledge, and risk-based governance systems. But regulators have overreacted to market and industry events and, in some circumstances, have magnified their effects. Pension funds need to adopt a smaller number of simplified higher-level principles.
Are we now expecting too much from many governing boards and should the burden be taken out of the hands of lay (non-professional) boards? While member involvement is a worthy concept, any insistence that a proportion of a fund’s governing board must be member-nominated will not on its own improve governance. The argument is now being advanced that members of governing boards must possess appropriate professional qualifications to deal with the complexities of modern day pension funds. Has the time arrived when qualifications are no longer nice to have, but essential to the success of the pension fund? Where there is a substantial lay involvement, there is a potential weak link in the chain that needs to be scrutinised.
Alternative structural changes to existing governance systems have been explored before. But in a continuing complex environment, can merely bolting on to what we already have create the right mix of experience?
As representatives of pension fund beneficiaries and sponsors, how can lay individuals (whether they are fund members or company executives/directors) continue to play a role in the governance and supervision of their pension funds? New business models are needed. When we seek to incorporate a structure of lay involvement, then the debate becomes less clear. We must review the bigger picture and develop a more businesslike position on lay involvement. Government attempts to simplify the pension system (including trusteeship) have resulted in further complexities.
If society wants broadly-based boards to supervise the successful operation of a pension fund, we should be moving towards a two-tier system of pension fund governance.
It is now clear that pension fund governance principles and practices need rebalancing. There should be a new two-tier governance model to involve both lay representatives and professionals by means of a fiduciary body (comprising professionally qualified individuals or institutions) appointed and supervised by a board of governors (elected and appointed individuals who are representatives of fund members and the sponsoring company). This dynamic and more businesslike approach should be supported by a code of pension fund governance to provide guidance and assessment for high governance standards.
Some 12 months ago, I was commissioned to undertake a review of pension fund governance across Europe. The results of the review have been widely discussed in many countries. Apart from the Netherlands, which leads the way in pension fund governance, progress has been slow. This two-tier model still stands, but it will be up to governments, pension industries and pension fund stakeholders to drive change in governance.
The report Ensuring pension fund governance is fit for purpose can be viewed on a number of independent websites.
KEY points
■ Pension fund governance principles and practices need rebalancing
■ A new two-tier governance model is required to involve both lay representatives and professionals
■ This should be supported by a new code of pension fund governance to provide guidance and assessment for high governance standards
Brian Holden is a trustee life coach
