Given the attention focused on pension governance these days, many organizations are reviewing their governance structures for ways to strengthen them. And one of the best ways of affecting a quick improvement is to target the organization’s current pension committee. For some this will mean creating a committee where none exists.
Pension committees are key to applying principles of good governance. (This article focuses on single-employer pension plans registered in jurisdictions other than Quebec.)
The processes that support a good governance structure must ensure that responsibilities are assigned to the “right people” in the “right place.” “Right people” means those making the decisions possess the prerequisite knowledge, skills and experience. “Right place” refers to where in (or outside) the organization power or responsibility resides. That is, how is power shared between the board and senior management? Who is responsible for what?
These people must have access to the “right information” to make decisions and perform as expected. Overall performance of these people must be subject to performance review.
Good governance and pension committees
Pension committees are an excellent opportunity to bring together the right people — that is, persons both internal and external to the organization who possess the specialized pension expertise and who have the time to focus on pension matters.
Boards, given their policy role and strategic focus, are not the right place for most pension matters to be decided. Pension committees, on the other hand, can take on a wide range of strategic, managerial and operational issues, provided they are not true subcommittees of the board.
A true subcommittee of the board is one where all voting members are board members. Board committees should only focus on board business and the board’s business is policy setting and strategy approval — not managerial and operational issues, which properly belong to senior management. That is why most pension committees are management committees and not board committees.
Besides relieving the board of issues that would only distract it, a pension committee can assist in making policy recommendations.
What constitutes “right information” is very mandate-driven. By delegating many of the pension decisions to a pension committee, the board can properly focus only on information that shows how the organization is performing relative to the goals or mission policies and constraint policies established by the board. The pension committee must also be rigorous in its information discipline to ensure that the information it receives is relevant, accurate, complete, timely and presented in a concise reporting format.
Performance must be reviewed regularly against predetermined objectives or criteria and changes implemented as needed for both boards and committees.
How organizations typically misuse or under-use pension committees
Pension committees are misused or under-used in a variety of ways that violate the four basic principles of good pension governance.
Right people: Some pension committees lack certain hard and soft competencies. In addition to finance and human resources, pension committees need members who can properly represent an organization’s various business operations.
Pension committees don’t always dedicate the time and resources needed to properly orient new members and keep existing members up-to-date through training and other education initiatives.
Some pension committees are too small, others too large. Committees of three to eight members generally work best.
And, not all pension committees are structured to facilitate successor planning and continuity of knowledge. Successor planning is more of an issue where pension committee members are named appointees as opposed to appointees who hold their membership on the committee because of their corporate position, such as the VPs of HR and finance.
There are numerous techniques available to improve successor planning. For example, chairperson and vice-chairperson roles can rotate, appointment terms can be staggered and a retiring chair can be designated as a “past chairperson” and given ex-officio status.
Right place: Boards often under-delegate pension matters. At the very most, boards should only hold policy-setting pension functions; namely, approval of plan design policy, funding policy, investment policy and expensing policy. And, where the pension plan’s assets and investment returns are not material to the plan sponsor’s financial position, even these policy areas can, and should, be delegated.
Right information: Often, pension committees receive too little information in some areas and too much in others. The key to controlling the flow of information is to have a clear understanding of the pension committee’s mandate and a well-developed agenda.
Take a pension committee’s investment mandate for example. Investment responsibilities can be organized into four categories — investment compliance, investment policy, investment process and investment performance. Very little of the committee’s time should be spent on investment compliance and investment performance if the committee receives appropriate compliance and performance monitoring reports. This means not wasting as much time on meetings with investment managers discussing their quarterly results no matter how fascinating the information. Instead, the committee should dedicate most of its time to investment policy.
Where an organization has created two pension committees (for example, an investment committee and a plan committee etc.), sometimes neither committee fully understands the link between issues that affect both funding and investment strategy; namely, funding policy drives investment policy. (Funding issues like liability maturity patterns, membership trends, evolution of plan liabilities based on changing plan design and financial market trends and risks and their potential effect on the solvency of the plan all impact investment policy.) In this case, the two committees need sufficient linking information.
Right performance review: When delegating responsibilities to a pension committee, boards rarely set any performance standards. Boards are still tackling the broader issue of monitoring their own performance and that of their sole employee, the chief executive officer. This situation is unlikely to change for pension committees anytime soon, making it a challenge to review the performance of pension committees in the absence of performance measures.
No committee equals weak litigation defence
And finally, there are those organizations that do not have pension committees at all. Theoretically, this means that the board is still seized with making all pension decisions no matter how mundane. In practice, however, it means that certain senior managers are making many pension-related decisions without any clearly articulated authority to do so. And usually, the reasons for these decisions are not well documented and pension activities poorly supervised.
Boards operating under these circumstances would find it difficult to use a due diligence defence when confronted by litigation from plan members.
When boards and their agents (such as pension committee members) are sued, they can avoid liability if they can prove they have been diligent. The law does not demand perfect decisions — just reasonable decision-making processes.
The proper use of a pension committee can go a long way towards strengthening an organization’s pension governance structure if the right people are chosen to sit on it, the committee’s mandate is well articulated and the committee receives the right information to discharge its’ responsibilities.
Jayne Casanova is an associate with Watson Wyatt Canada, specializing in retirement practice. She is a lawyer and a chartered accountant. She may be contacted at Jayne_Casanova@
Pursuing good governance
Good governance means attention to the system used to organize the roles and responsibilities of all parties (both internal and external) involved in administering pension plans.
Through good governance organizations sponsoring plans can reduce administration costs, funding costs, legal liability and the likelihood of further government regulation in this area.