Few pension funds in Europe are still unaware of their responsibilities as shareholders. Corporate accounting scandals and public outrage over excessive pay rewards have woken them up to the need for this.
But even though funds now know they need to be more actively involved in the way the corporations they invest in are run, their own governance has been out of the spotlight.
“Pension funds generally haven't perceived examining and improving their own governance as a priority until very recently, but it's right up there on the agenda now,” says Elizabeth Renshaw, European partner at Mercer Human Resource Consulting in the UK.
The OECD brought out best practice guidelines on pensions governance in July 2002, but there has been no legal requirement, in the UK at least, for pension funds to report on governance and risk management to their members. This contrasts with charities legislation, for example.
“It has been quite informal up to now,” says Renshaw. “Trustees in the UK and board members throughout Europe have started to engage, and some are at the forefront of good governance. In my view, we will see more and more of this” Mercer is advising its clients about this.
Improved governance demonstrated in effective trusteeship has become more important as part of the fall out from the pensions epidemic with two funds suffering through market volatility, and the public furore around whether defined benefit promises can actually be delivered.
But the issue of pensions governance is not an easy one. While it is easy to point the finger and say a board is not doing the right thing, it is far harder to understand what they can do. There are a series of agency relationships to consider, involving the board, the sponsoring company, scheme members, administrators and fund managers.
“The challenge is for the board to be supervising all of these relationships, but at the same time recognising that the activities these agencies perform are not always or easily under the board's direct control. It is essential for the board to have clarity over the crucial distinction between responsibility for supervision and execution. How this distinction is managed is the foundation for improved governance,” says Renshaw.
Austrian fund Vereinigte Pensionskasse (VPK) is already taking steps to solidify its governance. Wolfgang Pinner, chief investment officer says that in the last couple of months, the pension fund has developed its own mission statement. The exercise was aimed at pinpointing how the fund understands itself, and how it wants to interact with its customers – those receiving pensions and those still contributing.
The guidelines it has drawn up were made necessary partly because the fund has grown such a lot in recent time. VPK, as its name says, is the result of several mergers of different pension funds. Rather than being a disparate collection of former entities, those at the fund opted to create and define its own single identity, and used the mission statement to set it in stone.
The document is several pages long, and has yet to be officially released. But it contains five core values: responsibility, stability, quality, flexibility and esteem. The statement, says Pinner, contains a vision, and several targets regarding the client base, the fund’s asset managers, the employers and employees and the organisation itself.
Pinner says there has been a general move among Austrian pension funds towards considering the integrity of the way they are run. “In principle, this process is happening, and our pension fund should be one of the forerunners of this,” he says.
The whole pensions business has been through a period of difficulty, he says. Looking back, the whole system came into being in 1990, and then had 10 years of bull market to ride. There were no problems at all on the equities side. But between 2000 and 2003, the bear market forced the reduction of some pension payments.
This led to a lot of discussion, which brought the issue of how pensions are run into the open. It then became necessary for the industry to think about the relationship between the different stakeholders. “And that is still going on,” says Pinner.
Nicklas Fahlstrom, senior consultant at Wassum in Stockholm says sponsors of pension schemes in Sweden are now focussing a lot of attention on making sure the funds are run in a visibly responsible way.
“I think they take pensions governance very seriously,” he says. For the sponsoring companies, not just governance, but the whole area of pensions has become a more important one in the last few years. This has had a lot do with the way the stockmarket has progressed over the last decade or so, he says.
“Five or six years ago, there wasn’t as much interest, and this was due to the good returns. There was a surplus, and all that had to be decided was simply how to split that surplus,” says Fahlstrom. But conditions have now forced pensions providers to sit up and think.
“In some ways, the slide in the market has been good,” he says. “People have realised that this (endless growth) is not the normal state.”
Richard Stroud, chief executive of the Pensions Trust, says his organisation is already looking at governance in two ways. Firstly: “Ourselves, and how we do it – we regard the governance of our capital trust as a very important thing. Also regarding the remuneration committee. We want to make sure we’re clear and transparent,” he says.
Secondly, the trust looks at the way it behaves with regard to its investment assets.”We exercise votes in line with the NAPF system,” he says.
More and more members are concerned about these issues, he says. “We are used by 3,500 participating employers. Some of them are very ethically minded, for example Oxfam and Christian Aid. If we’re not, it could backfire on them,” he says.
In Denmark, the issue of pensions governance has been discussed within government at length. At the moment, a sub-committee is working on the whole subject and is due to report to government at the end of June, says Soren Kolbye Sorensen of Danish engineers pension fund DIP.
“So the debate is slightly on hold for a couple of months,” he says. But when the results of the committee’s deliberations are out, public discussion is bound to begin again. The pensions industry has put a lot of time and thought into the matter, he says. It is a question of how the principles of corporate governance could be integrated into the retirement funding industry.
“We have looked to see how we could adhere to as many of these principles as possible,” he says. It is important for members of the pension scheme to be able to have clarity, to see what the people who are looking after their money are actually doing with it. DIP has good corporate governance policies in place, says Kolbye Sorensen, “And we’re not afraid to look at our own governance and see if the principles are being applied here too.”
If the fund is able to avoid conflicts of interests and have a much transparency in its organisation as possible, then this is good for the members, he says.
There is no doubt, he says, that the issue of pensions governance is taken seriously throughout the Danish pensions industry. “There are no pension funds who have not thought about it.”
The issue goes straight to the credibility of the industry itself. “If we are able to make sure we have the confidence of our members, then we have to have clear transparency,” says Kolbye Sorensen.
Governance, says Roland van den Brink, managing director of investments at PME in the Netherlands, is a soft issue rather than a hard one. This means it should be solved as a soft issue. One must ask whether pensions governors can work in an area where there is a culture of trust or not.
“If you ask why people violate governance, it is mostly through frustration etcetera,” says van den Brink. “Governance has to do with the culture and not rules.”
Principles, he says, should come first, and not rulings. Strict rules are sometimes made within business organisations about how representatives may behave or speak, but there is a danger that this takes them away from a normal business culture. In this way it can ultimately have a negative impact on the climate of trust within the organisation.
If the conditions for good pensions governance are to be achieved, then one needs to go for balance, he says.
In the Netherlands, the minister of social affairs is meeting with pensions industry representatives to discuss governance. The two main pensions fund associations, OPF, the corporate pension funds association, and the VB, Vereniging van Bedrijfstakspensioenfondsen, representing industry-wide pension funds, have jointly produced a working paper for the meeting.
The two parties have come up with a series of pension fund governance rules and best practice for pension funds.
Before the Ahold debacle, the discussion on governance was rather an academic one, say those in the industry. But now the whole matter is seen as serious and urgent.