Who are the right people to being making pension decisions for your organization? And what should their core competencies be?
The answer differs depending on your circumstances. HR professionals with pension plan responsibilities may find themselves working under different scenarios over their careers.
The “right people” depends on what pension-related decisions they are expected to make, determined by the particular pension-related governance structure an organization has adopted.
In some organizations, boards have retained the authority to make some or many of the pension decisions, while other boards have delegated all such decisions to others. Those “others” can be subcommittees of the board, senior management committees or individuals such as the chief financial officer or the director of human resources. They can also include persons external to the organization such as actuaries, investment managers, custodians and legal counsel, as examples. And an organization’s pension governance structure addresses if and how plan members or their unions, parent companies and other participating employers, if any, are involved in the decision-making process.
For the purposes of this article, we will assume that the board has delegated all decision-making on pension matters (such as plan design, funding, custody, investment and administration) to a senior management committee and outsourced certain functions related to investment and pension administration to third parties (investment and consulting firms).
We will also assume that this is a single-employer plan with only one company (non-unionized) participating in the pension plan and members are not directly represented. (These member stakeholders are addressed below.)
A pension committee must possess the required “content knowledge” or “hard skills.” Hard skills include:
•for pension-related investment, custody and funding matters — finance and treasury expertise;
•for plan design and administration — human resources expertise;
•for all pension-related matters — operational and business knowledge;
•for member disclosure and education — communications expertise;
•for CICA/FASB expensing and financial statement impact — accounting skills;
•for fiduciary and other compliance matters — legal expertise;
•for funding matters — pension actuarial capabilities; and
•in unionized environments — labour relations expertise.
Operational, business and communications capabilities are often overlooked as necessary skills. Those who work on the “line” side of the business know their current staff, their future staff needs and what it takes to attract and keep them. They also have to balance the people side with the finance side as most general managers operate their segments of the business as profit centres.
Communications is necessary to inform and educate the membership as to the nature and value of their benefit packages and how to save for retirement. If the pension arrangements include money purchase components and allow plan members to direct their own investments, much communications skill and effort is required to meet the challenge of educating members on investment matters.
Very few organizations possess all this expertise in-house and normally retain third parties (such as, a consulting actuary, legal counsel or investment managers) on an agency or advisory basis. Apart from their specialized skills, these outsiders bring additional value as independent, objective committee members (or, more likely, committee advisors) who can play vital roles in reminding committee members, when necessary, of obligations to plan members. They can also identify situations where interests of a particular stakeholder group are dominating the pension agenda and assist in balancing the different stakeholder perspectives.
As well, committees usually work best if they are not too large. Committees of three to seven persons usually work most efficiently.
The pension committee requires members with “soft” skills, as well as hard skills.
Soft skills include intellectual competence, education, congruency of personality and values with predetermined norms, commitment to the job, common sense, effective leadership and the ability to be a team player.
Pension committee members need both orientation and ongoing education to understand their roles as pension committee members and to maintain their core competencies. Orientation education focuses on introducing new committee members to the key pension documents, the subject of pension plans generally, the pension committee’s mandate, mission policies, constraint policies and process policies and the important decisions the pension committee has made in the past.
Ongoing education focuses on functional content such as, pension legislation, funding principles, investment concepts, and so on. It is designed to keep pension committee members abreast of pension trends, changes in legislation, funding, investment and other developments.
In addition to core competencies, the organization needs to address the issue of stakeholder representation, and member or labour representation on decision-making committees is the most controversial.
Most plan sponsors shy away from member representation because management fears a loss of control and the addition of a parallel avenue to the collective bargaining process as far as pension benefits are concerned. Although joint governance where management and labour are equally represented would be inadvisable if management’s relationship with its unions is less than friendly, there are advantages. Joint governance means sharing the risk with the unions and ensures that the plan membership’s perspective is fully considered. As an alternative to joint governance, members can be represented without management losing control by ensuring management representatives outnumber labour representatives on the committee.
Another aspect of stakeholder representation exists when the plan sponsor is a subsidiary.
Many Canadian companies are subsidiaries controlled by parent companies located in foreign countries. What role does the parent company wish to play in decisions about the Canadian organization’s benefit programs? It is common for these decisions to be vetted and pre-approved by the parent company before they are approved by the Canadian board of directors and implemented by Canadian management.
When it comes to Canadian benefits programs, foreign parents often list a major concern as uniformity. That is, they want some uniformity of benefit design throughout all their companies.
Other common considerations include the cost of benefit programs, competitiveness of benefit programs to attract and retain the desired personnel. Some organizations wish to be considered “best employers” in their markets, while others are content with lower quartile placing.
All three objectives — uniformity, competitiveness and cost — can be viewed as constraints. Parent companies are often willing to remove themselves from the decision-making process altogether if these constraints are built into the original delegation to the pension committee. These constraints act as guidelines for, and limits on, pension committee members when making decisions.
And, finally, although one company may have established the pension plan (the “plan sponsor”) there may be other related or subsidiary companies that also participate in that plan (the “participating employers”). Since decisions of the plan sponsor can materially impact the financial statements of participating employers, participating employers are often represented on the pension committee. This ensures that the perspectives of the other participating employers are understood.
So, the right people are those who possess the prerequisite knowledge, skills and experience required to discharge their pension-related responsibilities and represent important stakeholders such as the plan sponsor, participating employers and the plan membership. Both skills and stakeholder representation combine to ensure effectiveness, efficiency, compliance and perspective.
Jayne Casanova is a consultant in the Toronto office of Watson Wyatt Worldwide. Pierre Caron is senior consultant, and leader of Watson Wyatt’s Canadian investment consulting practice. They may be contacted at firstname.lastname@example.org.