Re-engineering supervisory boards
A draft code on pensions governance has been published in the Netherlands. The Vereniging van Bedrijfstakpensioenfonsen (VB), the association for industry-wide pensions, has given details of its preliminary code which sees structural change as the way forward for credible pensions governance.
The code is the latest outline to be produced by the industry in response to last November’s call from Mark Rutte, the junior minister for Social Affairs, for the Dutch pensions sector to take responsibility for pension fund governance.
Peter Borgdorff, director of the VB, points out that the new code demands structural changes to the way the pension funds are run. For some funds, he says, this will be hard. “They have put a lot of work in forming their councils and then they have to change it again,” he says. They will need some time to do this.
“Big pension funds are able to establish supervisory boards before 2006, but I think the smaller funds will have to take more time over this,” he says. It is envisaged that they will be given until 2007 to have a supervisory board in place.
“Most pension funds already have an advisory council which includes scheme participants, pensioners and former participants with dormant pension rights,” he says. But the new draft code says that the council should be structured differently and should become supervisory. It should be made up of representatives from the employer, employees and pensioners.
“We think that the actual councils (that exist currently) can be upgraded to supervisory boards,” says Borgdorff. The main difference will be the selection of the board members. “In the new situation, we propose elections,” he says. “In this way, we can guarantee that everyone is a representative. It is more democratic.” But setting up these elections will certainly take some time.
Though the draft code was agreed unanimously in the VB working party that made the draft, Borgdorff foresees areas of debate in the wider industry. “For example, the representative of the employer or union who deals with the labour agreement should not be a member of the board of the pension fund, because he is also the one who makes the agreement over pension rights. We think this shouldn’t be the same person,” he says. There could be conflicts of interest if this were to happen.
However, some of the unions are already saying they simply do not have enough people available to have two different individuals to fulfil these separate roles.
Also, there is the stipulation within the draft that the external auditor of a pension fund should not be associated with the firm of the external actuary. “We say they must be separate, but some funds might say this is too expensive for them.”
But such exceptions can easily be made. “We don’t mind, because we say in the code – comply or explain. There shouldn’t be problems in any situation because this code is not the law.”
Now, members of the VB and other stakeholders will put forward their responses to the draft and make their comments. This consultation process will last until the end of September this year, formally coming to an end on October 4, 2004. “Responses will be gathered, we will discuss what we might change and at the end of October the board of the VB will give their consent,” says Borgdorff. After that the annual meeting of members will ratify the code on November 16.
How far away from compliance are the Dutch industry-wide pension funds at the moment? “Right now, there is no industry-wide fund with a supervisory board. Seventy-five percent of our members have an administrative council and the number is growing. So members do not have a problem with the principle of a supervisory board.
“And most of the pension funds have got a set of internal rules for checks and balances for disclosure and transparency, but there is no cross-fund consensus on how to act.”
Some within the industry have questioned the need for a code on governance. “Some pension funds say this,” says Borgdorff, “but we say, society asks for it. Also, there are questions coming from the political sphere. They want to know what we are doing on the governance side. We want to take an active role in this…The goal we want to achieve is to create more trust in pension funds.”
It is important for pension funds to have their governance in order, particularly so in the Netherlands where contributions to pension schemes are mandatory. “Then there is an obligation (on the part of the funds) to give full disclosure on your asset policy and your liability policy,” he says.
Now that the VB and the OpF, the body that looks after corporate schemes, have published their ideas on how pension funds should act to ensure good governance, the onus is on all parties to work together to formulate one code which takes in the views of them all.
Borgdorff points out that while the pensions system in the Netherlands is a very big one at around E500bn, it is still too small for there to be disagreements between pension funds on how they are run. If the funds themselves can’t agree on a code for governance, then the politicians will do it for them, he says.
Rene Bastian, director of the UVB, the professional pension funds association, says the code put out by the VB is useful and has some very good ideas in it. But it has been presented as a code for all pension funds in the Netherlands, he says.
However, he stressed that it was developed within the VB’s own pension fund membership, and the other two types of pension fund that exist in the Netherlands were not involved in that process.
He points to two basic elements in the VB draft code – that of reporting and that of supervision. One of the issues for those drawing up the VB code was whether reporting at the industry-wide pension funds was sufficiently developed. This is an area that would not need strengthening to such an extent for members of the UVB, says Bastian.
“When you look at the professional funds, we think this is very well developed. In the annual reports, the boards give an explanation to the participants themselves, and they have to approve this,” he says. “This (reporting) aspect is well covered by us, so we don’t feel the need to develop anything new.” But the UVB, when working on its own ideas for a governance code, will take the supervision points in the VB code into account, he says.
A UVB working party will start looking into the question of governance guidelines in August, and will try to have some finished ideas by the end of the year, says Bastian.
Rob Kregden, secretary of the OPF, points out that the VB code goes further than the OPF guidelines published earlier this year.. “One difference that is quite striking is the solution in terms of the structure of pension funds,” he says. “We don’t see that… we see it (the solution) more in the culture of funds; we think there should be a culture in which there are good governance principles,” he says.
Kregden expects that after the VB has had the opinions of its members on the draft code, then there will be some discussion between it and the other associations.
VB’s governance code
The draft code is subtitled ‘Rules for the management, control, accountability and supervision of pension funds’. These are the main elements it contains:
q All pension funds in the Netherlands are able to comply with the Code;
q The board of management consists of representatives of employee and employer organisations;
q The board of management is accountable to the supervisory board;
q The economic stakeholders, namely, employers, employees, pensioners and former participants have seats on the supervisory board;
q The supervisory board is also charged with the supervision of the board of management of the pension fund;
q The supervisory board has the power to force the resignation of the board of management in matters of grave importance;
q Members of the board of management and members of the supervisory board must meet concrete and verifiable
requirements with regard to expertise
q The external auditor must not be associated with the firm of the external actuary.