On 7 July 2009, the Organisation for Economic Co-operation and Development (OECD) published an updated version of its Guidelines for Pension Fund Governance. The OECD is an international organization whose goals are to promote economic stability and democracy in its 30-member countries and also in developing countries. It provides a setting in which governments can compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies.

The Guidelines for Pension Fund Governance set “international standards for the governance of private pension funds, in view of protecting people’s pensions from mismanagement and fraud."

To some extent, the revisions recognize regulatory or best practice approaches that have developed in a number of jurisdictions since the OECD’s 2002 and 2005 guidelines were issued. However, they also reflect the current focus on the corporate governance failures that contributed to the 2008 / 2009 global financial crisis.

• Risk now makes the headlines

The 2009 Guidelines put risk firmly on the table and increase the onus on pension fund governance bodies to identify, assess and actively manage a broad range of risks. Auditors are explicitly acknowledged as playing a role in the verification of risk controls. Furthermore, risk is no longer limited to investment and biometric risk, but includes “intangible risk factors such as environmental, political and regulatory changes”.

• Conflicts of interest are in the spotlight

   

The 2009 Guidelines introduce a sharper focus on management of conflicts in all parts of the governing structure. “Basic” fund management now requires a formal conflict-of- interest policy, accompanied by regular reporting on compliance with the policy, disclosure, and recording of conflicts in meeting minutes. The OECD further recommends that the policy should “prevent even the appearance of a conflict of interest,” acknowledging the old adage that perception is reality.

• Committee or board member qualifications move up the charts

The requirement that members of the governing body be “suitable” is given greater emphasis in the 2009 Guidelines. Integrity and professionalism continue to be important, but competence and experience are now added to the list of requirements of a board or committee member. The 2009 Guidelines promote a formal approach, advocating the development of a template of required skills with regular review of the governing body’s collective skill set.

• The OECD takes a pass on passing the buck

The 2009 document states that the governing body “should retain ultimate responsibility for the pension fund, even when delegating certain functions.” The “should” leaves a bit of wiggle room, but the message is clear: Formal procedures for the supervision and monitoring of delegates (both internal and external) are needed.

• Participant-nominated board or committee members may have a place at the table

The 2009 Guidelines suggest that accountability can be enhanced if participants are “represented” on the board. The 2005 commentary, limiting the role of participant-elected representatives to an operational oversight role, has disappeared.

• Time to throw the (code) book at conduct unbecoming

High standards of integrity, honesty and fair dealing are imposed on members of fund- governing bodies. A code of conduct “should” be established to document the controls in place to promote independent and impartial decisions, ensure the confidentiality of sensitive information, and prevent the improper use of privileged fund information.

The principles and procedures outlined in the 2009 document are not new or revolutionary. Classic models for corporate governance, which form the basis for Mercer’s framework for effective benefit plan governance, incorporate many of the principles articulated by the OECD.

Mercer’s Benefits Governance Pillars

But the OECD goes further in 2009 by specifying a greater degree of formality and follow-up. For individual pension fund sponsors and fiduciary committees of multinational organizations, adopting the spirit of the Guidelines would involve:

• Risk management: Procedures should be established for the identification, assessment and management of risk.
• Effective committees/decision-making bodies: Board or committee members should be appropriately qualified and able to show their ongoing commitment to training.
• Policies: Written policies should be in place, supported by monitoring procedures to ensure compliance.
• Accountabilities: Pro-active strategies for managing real or perceived conflicts of interest should be followed; delegations receive closer oversight, both during selection stage and in ongoing scrutiny of performance.
• Supervision and monitoring: Regular and ongoing oversight practices require attention to selection criteria, service standards and performance monitoring practices for all delegates, both internal and external.
• Information flows: Effective reporting should include disclosure of the necessary information to plan members and beneficiaries, the sponsor and other stakeholders.

The Guidelines do not have the force of legislation, and there is no mechanism to police adherence to these principles. However, to the extent that the OECD’s perspective represents baseline principles for good pension fund governance, these updated Guidelines certainly raise the bar.