A two-tiered internal governance structure is being proposed in the Netherlands, the country that is leading on governance in Europe, and where the issue has been under debate for the last few years. Currently, according to the OECD, pension funds are incorporated legal entities separate from the sponsor, and have the legal form of a foundation. All funds must have an equal number of representatives from the employers’ organisations and trade unions, if they are industry-wide plans, and employers and employees if they are company pension funds.
Under proposals from the Stichting van de Arbeid, the Dutch labour foundation, also known as Star, there will be an independent commission for internal supervision. “We don’t tell pension funds how to deal with it, but we say you have to have three experts on pensions and they will take care of the internal supervision,” explains the VB’s Borgdorff, who was involved in the creation of the proposals. “The big funds will establish perhaps a one tier board, with the non-executives as the internal supervisors. Others will create a special board for supervision, while others, like PGGM, have decided that they have an audit committee with three independent members and they will get the task of supervision.”
Borgdorff says it is an important move for accountability. “At this moment, the board of a pension fund in the Netherlands has no obligation to give disclosure about what they have done. The board can decide to ignore advice and does not have to explain why. What we say now is that a board has to give full disclosure about what they have done, and why they have done it. They will think twice about why they are making their decisions when there is a board of accountability asking them what they are doing,” says Borgdorff.
Others say the structure will just confuse things, with internal supervision more efficiently done by the DNB, the pensions regulator. Consultants Watson Wyatt, for example, argues that internal supervision will lead to less external supervision, and a fragmented approach. Also, any accountability body with representatives from employers, members, and pensioners, will have natural differences of interest, making a joint opinion unlikely.
Other countries are also reviewing their procedures. The introduction of new sector pension funds in Belgium, for example, have allowed for a reconsideration of pension fund governance structures, says the OECD. Pensions will have a board with union and employer representatives.
In Denmark, the Pension Market Council published a study earlier this year, setting out a series of recommendations for labour market pension funds. The report examines the task and responsibilities of the board of trustees and executive management, the composition of the board, the size and education, and remuneration of the board, and its working method. It also looks at opportunities to increase transparency within pension schemes.
The Danish PKA fund says it has already had many of the policies in place. “PKA agrees with the principles of the report. To PKA the importance of board members being able to work in accordance with the interests of primary stakeholders is essential. Board members are appointed by primary stakeholders, the labour market partners and members of the fund,” says Peter Damgaard Jenson, chief executive officer.
The fund says it evaluates the board’s work on an annual basis, and has a comprehensive reporting system. It also implemented a communications policy last year and, says Damgaard Jenson, “PKA has established comprehensive educational programmes for delegates, board members and shop stewards. It ensures deeper understanding and debates among board members and facilitates much better sparring with the executive board. It also enables dialogue between fund members and board members in a very meaningful way.”
Surprisingly, Austria is also showing the way on governance. The main governance body of the Pensionkasse is the supervisory board. It consists of employers, employees, and pension fund beneficiaries who are elected at the annual general meeting.
Below the supervisory board sits an executive board of directors consisting of at least two members. This board is responsible for the operational side of the fund, and the members are appointed by the supervisory board. They must also be approved by the pension supervisory authority, and have suitable levels of experience and knowledge, says the OECD. In addition, advisory or investment committees may be established for each investment or risk sharing unit.
“We don’t have a bad system. We have controls at various levels. I also don’t think we have much difference in procedures for defined benefit and defined contribution plans,” says Gunther Schiendl, head of investments at APK Pensionkasse in Vienna. He believes Austria may have benefited from developing later. “It might be the advantage of being a smaller market or that there is an advantage of being developed later – so we can learn from the problems of those countries which developed earlier,” he suggests.
But Schiendl is also quick to point out that one solution does not fit all. “I would not recommend that other countries look to Austria. Universally, the issues are the same: they are conflicts of interest that should be avoided, relevant participation of various stakeholders, and so on.”