IPE SEMINAR - Pension fund governance needs to move forward from the "piecemeal" approach currently adopted towards a two-tier system and separate professionals from "lay" board members and trustees, a study produced by Brian Holden has recommended.
He presented the results of a review into the governance principles and structures of occupational pensions - commissioned by IPE and sponsored by Pioneer Investments - at an IPE Awards seminar in Barcelona this afternoon which showed there is an "overwhelming consensus" of respondents who believe lay involvement in governance should "come under scrutiny".
He said: "One important issue that came across in the review is that systems of governance have to change, but they must keep lay trustee involvement in a practical and workable way."
Holden told delegates "governance principles and practices need rebalancing", and as a result recommended a "two-tier governance model" to involve both lay and professionals though a fiduciary body".
The fiduciary body could be responsible for the day-to-day running of the pension fund and is comprised of professionally-qualified individuals and institutions which are appointed and supervised by a board of governors,and which in turn consist of elected individuals representing members and the sponsoring employer.
Holden added the responsibilities for the two tiers could be detailed in a Code of Pension Fund Governance which, he claimed, would "provide scope to cut back on the regulatory minefield" by offering guidance and self-assessment for high governance standards, with both tiers responsible for compliance on a "comply or explain" basis.
He also suggested the establishment of a European Pension Fund Governance Forum, to allow pension fund stakeholders, in particular lay board members and trustees, to allow them to exchange views and discuss the issues in a "more comfortable" environment.
That said, Holden noted across Europe different countries have different systems, and "one size doesn't fit all", but suggested the review's recommendations provided a "robust and fairly flexible framework that can be taken on board by different pension schemes in different systems".
"I think the national systems will and should continue but we need to look at pension fund governance as a whole and not as a piecemeal approach - with things bolted on to what we've already got - as it becomes unworkable and we forget what it was we wanted to achieve," said Holden.
He admitted it would be "very difficult if not impossible" for a UK pension fund to adopt the two-tier system as the UK has "very firm regulations that state funds must have a certain number of member nominated trustees on the board".
But he added: "It shouldn't be necessary for regulations to stipulate that. It should be for the pension fund itself. The board of governors would be able to decide and appoint the right mix of professional and lay trustees."
He emphasised the findings of his review - conducted through conversations and correspondence with European pension fund officials - do not "threaten national systems and how pension funds operate within them", because as countries have applied IORP in different ways "we all have something to learn from each other, which is one reason why I recommended the European forum for the exchange of ideas".
Holden also suggested the two-tier model would help 'lay' trustees and board members to continue to promote certain issues, such as environmental and social governance (ESG), within the pension fund.
He told delegates: "In the governance and management of many pension funds the people responsible for the governance of the fund in many cases are so inextricably linked to the management of the fund that its difficult sometimes to step back and spend the necessary amount of time to discuss broader policies."
"ESG issues in many funds are motored through by the genuine interest of the lay people on the board. If we have the two-tier structure I've outlined - where enthusiastic representatives from the wider workplace are on the board of governors - that's a much more practical debating chamber to determine effective policies to pass up the chain to the people responsible for the management of the fund."
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