Pension governance

How to get the best from company-sponsored retirement plans

By Simon Ferry

Many companies have now been through the process of introducing new corporate retirement plans to replace previous severance pay arrangements. This can sometimes be a challenging process for all involved, so it might be natural to feel that having introduced a plan, the job is done and it’s time to move on to other things. However, in many ways, getting the plan in place is just the first step of an ongoing process.

In recent years corporate governance has become a hot topic ― with many countries tightening regulatory requirements to improve governance and risk management. This desire to improve the transparency and accountability of how companies are run can equally be applied to retirement plans. In fact, in some countries there are specific regulations relating to exactly that.

Korean regulations continue to develop and add clarity to the division of responsibilities for running and managing retirement plans. This has included recently clarifying fines involved for employers and pension providers ― plan administrators and/or asset custodians _ when things go wrong. However, there are still many areas where companies can take the lead on improving the way retirement plans are managed. This will lead to reduced risks for the company and employees in addition to making sure the plan is well protected and delivers the best outcome and value to all concerned.

The way in which retirement plans are run is especially important, given they might typically represent about 30 percent of the value of an employee benefits package in Korea. However, many people may not be aware of the full value of their benefits.

The diagram below (figure 1) illustrates a sample framework for developing and implementing policies for retirement plan governance. This is an application of the control cycle which is a concept that can be used in a range of situations where there are problems to be solved, or risks to be managed.

There are numerous potential objectives which may be relevant to the management of a retirement plan. These objectives may also be different for each organisation, but some should be common to all. These would include:

● Complying with legislation and regulatory requirements

● Ensuring a clear and accountable process for making decisions

● Understanding potential risks

● Defining what risks to manage and implementing a suitable risk management strategy

● Clear documentation of process for plan management, with transparent and open communication to relevant stakeholders

Objectives may also be inter-related _ this is where development of a risk management strategy is integral to plan governance. For example, failure to comply with regulations may result in a fine, which is clearly a risk. Similarly, if the decision-making process is not transparent and it causes plan members to potentially be worse off, then it may result in a greater risk of an employee challenging those decisions and potential financial consequences.

When it comes to putting these concepts into practice and how a plan is managed, there are a range of questions which can be asked, such as:

● How are pensions decisions made?

● What skills are needed to make pensions decisions?

● How transparent is the process for making decisions?

● What risks does the plan present?

● How do we ensure compliance?

● Are we getting the best service and best value from providers?

Considering these types of questions and testing the current way in which the retirement plan is managed will help develop a suitable approach to plan governance. These questions are considered in more detail below:

How are pensions decisions made?

While regulations may make it clear what responsibility sits with the company and what is with the providers, it may not be clear who exactly within the company makes those decisions and who needs to be consulted. By developing a governance policy and specifically allocating responsibilities to individuals, or a particular committee, the decision-making process can become much quicker and more transparent.

What skills are needed to make pensions decisions?

In many cases the people making decisions will be highly experienced and used to making key decisions. However, it may be that their direct knowledge of the often complex world of pensions may be more limited. This may mean that specific pensions related training is needed. That way, decision makers can be fully aware of potential implications and can make an informed choice on what’s best for the plan and employees.

How transparent is the process for making decisions?

When decisions are made, good governance dictates that there should be a clear basis for why and how those decisions have been taken. This means being transparent with the process used and having recorded why a particular outcome was decided. This way, if there are questions in the future, or if a decision is challenged, there will be a clear justification of how and why the decision was made. This will also reduce the chance of conflicts of interest arising (where decisions are influenced by factors such as personal relationships or beneficial outcomes for the decision makers could be questioned as clouding their judgment).

What risks does the plan present?

Depending on the type of plan ― severance pay, defined contribution, or defined benefit ― there may be a range of different risks present to employees and the sponsoring company. A key aspect of plan governance is to identify these risks, understand the chance of them occurring and what the impact could be if they do occur. Based on this, it is possible to actively decide whether any actions can or should be taken to remove or reduce them. Where risks can’t be removed, planning in advance for what actions need to be taken if they occur will save time and reduce the impact that such risks might have. This information can be complied into a risk register.

How do we ensure compliance?

The corporate sponsored pensions environment continues to adapt and grow, with changes in regulations, legislation and the demands placed on retirement plans. In this evolving environment it’s important to actively monitor compliance – by being on the lookout for any new developments and also considering the processes and practices put in place to minimise the chance of falling foul of any compliance requirements. Pension providers play an important role in this area, but companies can still look to take ownership of compliance and make sure that best practices are put in place and followed to minimise compliance related risks.

Are we getting the best service and best value from pension providers?

While there is often intensive competition when first selecting retirement plan providers, without continued monitoring from companies, there may be a lack of momentum as the market matures where there is more focus on making money than winning initial business. This is where it is important to keep pressure on the providers in terms of their service offering, quality and fees. This can be achieved by regularly evaluating their performance against agreed benchmarks and comparing against the provider market, thus being able to actively encourage providers to maintain their service, or potentially change providers if beneficial for the company and/or employees.

As part of good retirement plan governance it’s vital to put a system in place to monitor how the plan is delivering to the objectives that have been set. This could involve monitoring a range of different aspects such as: plan investments; provider’s service level; fees; regulations or market developments; plan members’ engagement & participation etc. The chart below (figure 2) is taken from an Aon Hewitt survey of U.K. Defined Contribution (DC) retirement plans in 2008. Although this is a different pensions landscape to Korea, it illustrates the emphasis put on plan governance and monitoring within a more mature DC market.

It shows how a significant proportion of respondents had recently reviewed a range of governance aspects and in particular, employee communications (with 68% of respondents having reviewed within the previous year) and the range of funds offered (with 58% of respondents having reviewed within the previous year). Similar concepts of plan governance can be equally applied to Defined Benefit style retirement plans.

By capturing key information on a retirement plan regularly, it will allow the relevant people to be equipped to actively make decisions in a timely way and continue to develop the management of the plan, thus reducing risk, maintaining service and improving engagement and outcomes for plan members.

Simon Ferry is a pension consultant at Aon Hewitt.