In this month’s Off The Record we broach the subject of pension fund corporate governance (PFG) and ask whether schemes need to get their house in order and if so how can it be done.
PFG has been described as asking: “Is the business being done properly?” and, happily, Off the Record can report that the concept is not unknown in Europe’s pensions market – which is a good start!
Around 60% of managers reply that governance concepts are already active in the marketplace.
On a less optimistic note, not one of the scheme managers replying that PFG does not exist in their domestic market believes that it will graduate to become an accepted reference standard in the future.
One fund believes that PFG is by and large an unnecessary addition to the work they should already be doing, noting: “We do not invest in companies where the management understand less of their business than we do.”
Another cites a domestic idiosyncrasy that renders such a system of governance rather problematic: “The Austrian pension fund industry mainly invests through investment fund vehicles and is very much diversified (globally). The direct relation to companies re their governance is more than difficult.”
What then are the drivers behind the introduction of PFG in certain markets and not in others?
For some of you there appears to be an inherent culture shift that is moving things forward. As a manager notes: “Basically it is a result of corporate governance in general. If you judge companies you invest in on CG issues then as a pension fund you should also judge yourself. National governments also spread signs of interest on the PFG issue.”
Other respondents cite similar pressure: “Interest in PFG is coming from all sides, the pensioners, ourselves and the government,” says one.
Another scheme manager argues there is likely to be a snowball effect as the concept gains credence: “Funds are likely to have to answer more directly to their beneficiaries who will, increasingly, be unprepared to accept PFG standards below those adopted in other areas of financial services.”
Taking a step back, we asked whether PFG was actually helping to raise standards on the ground.
Two-thirds of schemes felt it was improving quality, although a fund chief added the proviso that this was only the case if governance standards were used as controlling devices.
We then asked whether you thought the present structure of the pension fund allowed you to run operations efficiently. Perhaps this was a little too open as a question, with not many replying in the negative. Eighty per cent said the fund framework was efficient, with most adding little.
An interesting comment was, however, elicited from one PFG fan: “That question depends on how you measure efficiency. The standard norm within the EU is still missing. That’s what PFG can add.”
On a scale of one to 10 (10 highest) we asked you to gauge how efficient your fund was and then how efficient the funds in your domestic market were. For your own funds the average score was 7.6 out of 10, or around 76% efficient.
For the market at large the scores were lower, averaging 5.9 out of 10 (59% efficient). There may be an element of psychology here. Respondents tended to be those with a PFG strategy in place.
However, one thing it does reveal is the discrepancy in markets between those funds using governance tools and those that don’t. Indeed, pension fund members may begin to wonder why the standards being applied to their neighbour’s fund are not being applied to their own. Earlier comments on the potential snowball effect of such standards, perhaps pushed forward by the media, as some of you note, seem rather plausible.
So why isn’t PFG more widespread already? You listed the main reasons why the concept was taking time to gain ground. The most prominent difficulty was the “complicated structure” needed for PFG. This was followed by “political infighting” and “a lack of interest” – in fact it sounds almost revolutionary as a concept for many pension funds!
Certainly, in terms of which interested parties are supporting the adoption of PFG, there seems to be some division between funds over whether members and pensioners are actually behind such initiatives.
By and large, pension fund sponsors, trustees and trade union bodies come out in favour of PFG, but interestingly the majority of you say your national pension regulators are against such standards.
Asked then what the three most practical steps that could be taken towards running the fund more efficiently were, you provided a wealth of suggestions. Excluding better staffing and greater skill levels, other notable proposals included pensions practice reference guides and industry standards, and the ability to benchmark clearly both locally and internationally.
One manager sees the future in a less patriarchal approach by the state: “We need less government interference and a loosening of investment regulations.”
Another finds the key in technology: “We need access to all the financial details of the pension fund’s holdings on-line, so we can see them at the desk.”
Barely half of the respondents felt that what exists at present ensures adequate accountability within the fund structure.
For one manager the difficulty appears to lie in a lack of freedom to do the job properly: “The management of the fund should be given full autonomy based on a clear business plan and budget.” The ability to benchmark clearly and be able to follow up on these benchmarks is also reiterated by a number of you.
Nonetheless, the question remains whether there could in any way be a conflict of interest between running an efficient and well-controlled scheme and one that is accountable and democratic.
Only 30% of respondents believe such a conflict exists, although their arguments are not thin, with one manager noting: “Yes there is a conflict in part because to outperform you have to take decisions that go against common sense.” Fair point?
A further criticism backs up the first, claiming a kind of idealism in the nature of PFG: “No business can be run on a democratic basis. There has to be a management who makes the decisions and takes the responsibilities.”
Labouring the point a little further, one scheme manager is less polite about what the idea of pension fund “democracy” really means. “Democracy is not always favourable, especially if you find yourself with a group of people who hardly understand anything about the fund management business, ie, the scheme members opposed to a specialist management staff.”
We at Off The Record think we might have heard that one a few times used in a political context!
Who’s right then and what might at least be the best kind of fund governance structure that we could hope for in an ideal world? For some of you the question is just “too difficult to answer”.
One fund sees a top-down approach from the authorities as the only answer, replying: “Give guidelines what to include in the annual report and publish a compiled summary of the universe.”
Transparent reporting to all interested parties gets a few mentions, while one fund suggests that an employee member be made part of the investment panel of the scheme with full voting rights.
Isn’t it about time that a code of practice was issued though? Fifty-six per cent of you think it is. A scheme head notes that this should at least be integral to the EC directive on pension funds.
A peer adds a wish list for such a code, which would include: “Service level agreement for the scheme’s members and a description of responsibilities for members, trustees, staff and management.”
Let’s get to the bottom line though – how much would/should good governance cost? A single respondent tackles the question with a principled reply: “PFG may add costs, but this will be outstripped by the advantages.”