While they have been few in number, the various scandals at European pension funds have brought to light the need for clear and coherent codes of conduct for pension trustees and staff, writes Gail Moss
There have been several high-profile scandals in recent years involving criminal, or at least sleazy, behaviour by senior managers in the European pensions world.
Switzerland has been witness to at least two of these affairs. One involved parallel running – asset managers trading in the same shares as their employer – in the shares of the Swissfirst bank. The other saw the former head of asset management at Swiss public pension fund BVK found guilty of embezzlement and accepting bribes, in collusion with a number of other individuals.
Meanwhile, last year, the managing director of Keva, the Finnish local government pension fund, was forced to resign for charging certain personal expenses to the fund.
At a time of continuing austerity measures in many countries and a public backlash against ‘fat cat’ remuneration, it is vital for pension funds to ensure that trustees and staff conform to certain standards of behaviour, ensuring not only that beneficiaries’ interests are being properly protected, but also that no nasty surprises lurk behind the scenes to cause a public rel-ations disaster.
“When irregularities do arise, it makes sense for every pension fund to check once again if their current protection is adequate,” says Michael Valentine, investment consultant with Towers Watson Zurich.
Extracts from the code of conduct of Ilmarinen, the Finnish mutual pension fund
Ilmarinen’s mission is to safeguard the statutory employee pension cover of employees and self-employed persons, as well as to manage the investment assets that cover future pensions.
As we are a pension insurance company owned by our clients, responsibility is an inherent part of our daily operations and one of our corporate values alongside openness and success through teamwork.
Ilmarinen’s way of operating is determined in the company’s code of conduct. The code of conduct applies to all of our employees regardless of their position.
We do not give or accept bribes
Ilmarinen’s employees are not allowed to seek personal advantage by making use of their position or Ilmarinen’s property or information. Employees are not allowed to participate in decision-making on issues concerning Ilmarinen’s business transactions with companies in which they or their related parties are involved.
We are not allowed to accept or offer gifts or hospitality that are inconsistent with usual business practice or may affect independence.
Insider rules guide our operations
The use of insider information is prohibited. Ilmarinen complies with the insider guidelines of NASDAQ OMX Helsinki Ltd insofar as possible for an unlisted, mutual pension insurance company.
Ilmarinen’s board of directors has approved insider guidelines aimed at promoting public reliability. The guidelines also aim at increasing insider knowledge within the company to prevent any unintentional breach of the rules.
What to do in case of violation of the code of conduct
Any acts or situations that are in conflict with Ilmarinen’s code of conduct shall be addressed primarily through the supervisor, a representative of the management or the head of internal control.
These cases shall be processed as quickly as possible, with confidentiality and impartiality, and actions shall be taken based on them, in co-operation with the human resources or legal department, where necessary.
Depending on the nature of the issue at hand, Ilmarinen’s sustainability working group can also take a stance on the interpretation of the code of conduct and address conflict situations at a general level.
Throughout Europe, many aspects of ethical conduct are dealt with by national legislation. But there may be gaps which pension funds themselves still need to plug by adopting their own codes of conduct for trustees and staff.
For example, Finland’s corporate governance code and insider guidelines, set up by the Finnish Securities Markets Association, include rules on internal control and risk management, internal auditing and insider administration.
However, most members of the Finnish Pension Alliance (TELA) have in place compliance principles and codes of conduct covering issues like bribery, fair treatment of clients, compliance with laws and human rights. These rules are monitored and enforced by compliance officers and internal control functions reporting directly to the chief executive officer and the board. (See panel for sections from the code of conduct of Ilmarinen, the Finnish mutual pension fund.)
At yet, TELA has not published any recommendations, but is about to consider the issue as part of its revision of the model ownership policy – largely concerned with environmental, social and governance investing. It aims to publish the revised principles this autumn.
In Switzerland itself, the law governing mandatory occupational pension funds – the BVG – sets out comprehensive rules. These include a list of trustees’ responsibilities in relation to upholding members’ interests, the avoidance or at least disclosure of conflicts of interest, and a protocol for making business deals with third parties, for example, a formal process for appointing fund managers on a competitive basis.
Again, these are complemented by the charter on appropriate behaviour published by ASIP, the Swiss pension fund association. Included in the charter’s requirements is an annual declaration by trustees and staff setting out all the benefits they have received as a result of their position within the pension fund. Another requirement is for trustee boards to have equal representation to balance employer and employee interests.
At a glance
• Recent scandals have highlighted the importance of ethical conduct by pension fund trustees and staff.
• Pension funds should consider setting out a code of conduct to complement national legislation and industry codes.
• Gifts and hospitality should be disclosed above a certain monetary amount.
• The code should be flexible, so staff can still conduct business in a way that benefits the pension fund.
• Conflicts of interest should be disclosed before trustee meetings, with an agreed protocol on how these should be dealt with.
In writing please
A written code of conduct gives pension fund trustees and employees a framework within which to operate. This should start with a high-level governance policy at board level, setting out the responsibilities of board members and key committees.
From this will flow rules or separate codes, many of which will apply to all staff, some just to trustees, and some just to specific groups – for example, the investment committee and wider investment team.
Areas to be covered should include inducements, conflict of interest, insider dealing and possibly data protection. The Chartered Financial Analyst (CFA) Institute code of conduct for members of a pension scheme governing body is a useful template.
“Inducements” include hospitality, gifts (both as recipients and donors), and possibly expenses such as travel.
“If you’re an asset manager or back office vendor trying to win business, the temptation is to do whatever it takes, including arranging for tickets to a popular event or even, in days gone by, holiday trips,” says Howard Sherman, head of corporate governance product development at MSCI.
“Pension funds should draw up a policy regarding gifts and placement agent fees, listing what their trustees or employees are prohibited from accepting and what other entertainment or gifts need to be disclosed to ensure that hiring decisions are impartial and based on merit.”
Barry Mack, partner and head of governance at Hymans Robertson adds: “There may already be a tacit consensus as to what constitutes appropriate behaviour, but until something is written down, pension fund staff may actually not be all singing from the same hymn sheet.” A typical policy on gifts is to establish a monetary threshold on their value, say €30. Above this, gifts should either be rejected, or recorded, so that they can be audited.
Besides disclosing individual gifts of a material value, this process would also reveal if a single provider is making a succession of apparently modest gifts that add up to a significant amount.
However, says Mack, there should be flexibility in setting out the rules, because the acceptability of gifts or hospitality varies from one person to another.
“If you’re invited to something you couldn’t afford yourself, there is clearly a risk of undue influence, therefore you probably shouldn’t accept it,” he says. “However, the chief executive of a large pension fund can clearly afford more than a junior researcher, so the price by which they are going to be influenced is going to be different.”
Mack also says the threshold should not be pitched so low that it acts as a barrier to the efficient conducting of the pension fund’s business. “It makes sense, for example, for trustees to have dinner with an adviser because it’s a way of getting to know them better. That isn’t so likely if trustees are limited to accepting a cup of coffee.”
Review your code
Pension funds should generally have a separate, documented, conflict of interest policy for trustees, although some conflicts of interest might be unavoidable – for example, if a trustee is themselves a member of the scheme.
However, other conflicts of interest may be potentially damaging – for example, if a trustee owns shares in a provider tendering for an outsourcing contract, or is related to someone associated with that provider.
All conflicts of interest should be disclosed and recorded at the start of any trustee meeting, but how they should be dealt with may differ according to circumstances.
The individual concerned may be allowed to participate in any discussion but not vote, to be present at the discussion as an observer only, or be asked to leave the meeting when the relevant agenda item is reached.
Whatever the code of conduct applies to, it should normally specify the person – say, the chair of trustees – to be consulted where an individual is not sure what they are allowed or not allowed to do. “If in doubt, you probably shouldn’t do it,” Mack warns.
Codes of conduct should be set up by the board of trustees, then regularly reviewed, say on a three-year basis. The governance committee is clearly the best vehicle for this, but if the pension fund does not have one, it could set up a working group.
Alternatively, the work should be delegated to a designated individual or department, for instance, the trustee secretariat.
However, the board of trustees will always have ultimate responsibility for monitoring the development of the code and putting it into practice.
One potential problem that could occur in practice, in spite of the existence of any number of codes of conduct, is that of the dominant personality.
Getting the right mix of people is important for any board, whether it is the board of a pension fund, a listed company or a private company,” says Sherman. “While everyone brings expertise to the table, certain individuals may be more outspoken than others, so it is important to have well-thought-out and well-articulated policies, starting with a well-written statement of investment principles [SIP]. If a potential asset manager fits with the SIP guidelines, then one level of protection is in place already.”