Governance

 

Question: 1

This document focuses on the hierarchy of delegation of authority and roles in the governance process of ABC pension plan. The expansion of the fund has led to the creation of formal documentation process so that the objective of governance could effectively be achieved. For this purpose, the following governance system is proposed which is conditional to the acceptance of all the parties and stakeholders involved. Governance plays a fundamental role in establishing effective documented framework for financial management, investment management and programs for contributions and benefits. In the pension plan, the parties involved should meet the fiduciary obligation in order to achieve a cost-effective plan. An effective control mechanism for decision making is a key element in developing a better administration (CAPSA, 2004). Governance is important as it provides process and criteria for best practices.  The responsible parties have due diligence and accountability, and they are able to acknowledge and adhere to the fiduciary duty.

 

Board of Directors

            The board of directors is the highest and final authority to run and manage the pension plan. All the important decisions that are supposed to impact the fund in the longer duration could only be initiated after an approval by the board of directors. On the same note, the board of directors will play the role directing and supervising day-to-day administration as well as the internal plan. Board of directors  are expected to adhere to pension laws since they help in determining who is eligible for the benefit,  the chain of delegation and review  of the task (CAPSA, 2004). Thus, the board of directors has the power to approve the action and allow the pension committee to continue with the process in the pension plan.

The pension plan currently holds assets worth $25 million. All the decisions which may impact the firm greater than 17% of its total value or greater than 4.25 million could only be taken after an approval by the board. The board of directors has divided the objectives of the pension plan in three categories, Pension Management, Financing/Investment and Auditing & Compliance. To achieve these objectives, two sub committees would be created (Gold, 2005). The sub-committees are authorized to delegate its tasks to the following third parties. 

The Pension Committee 

            The pension committee is responsible for the following tasks.

• Recommendations with respect to design plan along with administration of the plan.
• Maintenance of the documents and regulatory compliance.
• Communicating with the members.
• Provide the committee members with necessary information for  best practices
• Set clear meeting agendas, goals and desired outcomes.
• Provide the pension committee members with learning opportunities to aid in making informed decisions and solving technical issues (CAPSA, 2004).

 

The pension committee could delegate its tasks to any third party firm for the tasks which majority of the committee recommends and is approved by the board of directors. At present time, the fund is administrated by Pensions R Us, an actuarial consulting firm. The pension committee would also be responsible to oversight the performance of the third party firm and periodically evaluate the performance (Munnell, 2006). If any lack is observed in performance as compared to other reputed firms of the state, the pension committee is responsible to recommend alternative name for third party administration.

Pension plan Administrator

 Pension plan administrator should perform the big task by following the direction of the pension committee. Note that the administrator has an oversight of the pension plan and is able to manage the pension fund.  The reason as to why this party plays the most important duty is because it develops a framework for internal control which is able to manage risk.  Since the pension plan governance is made by different parties, plan administrator is responsible for all tasks and he or she ensures that all tasks are performed through overseeing and administering (CAPSA, 2004).  Pension Plan Administrator plays a fundamental role in providing pension plan services to the agents and employees.  He or she is involved in administration and investment services and ensures efficiency in day-to-day operations. The administrator comes in touch with plan beneficiaries and ensures effective management functions. Administrators can act as a manager and have the obligation to set plan provisions, keep records, ensure that duties are done with respect to the standards and governing statute and implement of discretionary powers (CAPSA, 2004).

 

The Finance Committee

            The Finance committee is responsible for the following tasks.

 

• Selection and evaluation of the investment managers.
• Evaluation of the plan investments.
• Accounting disclosure
• Funding contributions
• To evaluate whether they are adequate funds
• Consider economic and demographic issues in administering funds
• Maintain the benefit security
• Evaluating and recommending the investment policy

 

The finance committee could delegate its tasks to any third party firm for the tasks which majority of the committee recommends and is approved by the board of directors. At present, the investment manager is Returns & Co. The finance committee would also be responsible to oversight the performance of the third party firm and periodically evaluate the performance. If any lack is observed in performance as compared to other reputed firms of the state, the pension committee is responsible to recommend alternative name for third party investment manager. Furthermore, the finance committee could also hire multiple investment managers.

 

 Internal control

 Even if the governance structure comprises the board of directors, the pension committee, the pension plan administrator and the financial committee, there must be an internal control which will ensure effective implementation of policies, management of funds and effective plan provision (Bergeron & Ronald, 1998). There should be internal control procedures which should contain responsibilities, recommendations and report formatting. To ensure that benefits are distributed fairly, procedures should guide the members and urge them to adhere to rules and regulations.

Generally, the governance structure and hierarchy of delegation of authority should be as follows;

 

 

 

• Approve action= Board of Directors
• Recommend action= Committee
• Report on action= Third party firm (Committee and internal control)
• Perform task= Third party firm (pension plan administrator).

 

Summary

            The above system of governance process has been designed on the basis of a number of important factors and reasons. Firstly, the proposed governance structure is inspired from an already existing and successful governance structure, which is called the corporate governance. For more than a century, the corporate governance has gone through various evolutions and development phases (Munnell, 2006). The current corporate governance system is the outcome of the experiences of more than a century. Hundreds of companies have successfully grown adopting the corporate governance structure. Due to its past success, the governance structure of pension plan has also been designed after inspiration from the corporate governance.

           

At the top of the hierarchy, there is the board of directors. The board of directors of the pension fund comprises the most important stakeholders that are responsible for the creation and termination of the board. These are the members who have a direct interest in the objectives of the plan and, therefore, are eligible to decide the long-term direction of the pension plan and important decision making (Munnell, 2006). Two committees are suggested because the main task of the pension plan could broadly be categorized in two major categories. Although one committee could also have been found to manage all the tasks, it was found suitable to divide the tasks and assign them to each committee which is solely responsible for its particular task.  The pension committee and the plan administer play a significant role in ensuring that duties pertaining to pension plan are met. Given that the committee sets important agendas and clear goals, the plan administrator enters in with discretionary power which improves the fiduciaries responsibilities. The roles of responsibilities played by the pension committee are mainly focused on best practices through developing clear mandates, resources and education (CAPSA, 2004).  On the other hand, the plan administrator provides the committees with regulatory requirement and governance practices necessary for the achievement of successful operation.  It also works with the financial committee to ensure that beneficiaries receive their benefits, prevent conflict and ensure transparency. To ensure effectiveness in all duties, internal control is a key element in ensuring that rules and regulations are adhered to (CAPSA, 2004).

           

The possible objections could arrive from the third parties. Previously no related clause existed that may allow any committee to evaluate the performance of the third party firm, and if any lack is observed in performance as compared to other reputed firms of the state, it may suggest alternative names. This clause might not be pleasant for the third party firms currently providing their services. They may argue that such a step may impact their integrity and long term association with the pension plan. However, it is important to suggest that every association with the plan should be based on performance. This is also in compliance with the objectives of the pension plan and important for its growth and long term survival.

 

 

References

Gold, J. (2005). Accounting/actuarial bias enables equity investment by defined benefit pension plans. North American Actuarial Journal, 9(3), 1-21.

 

Munnell, A. H. (2006). Employer-sponsored plans: The shift from defined benefit to defined. The Oxford Handbook of Pensions and Retirement Income, 359.

 

Canadian Assocition of Pension Supervisory Authorities (CAPSA).  (2004). PENSION PLAN GOVERNANCE GUIDELINES AND SELF-ASSESSMENT QUESTIONNAIRE.  

 

Bergeron J.M. Ronald. (1998). Guideline for Governance of Federally Regulated Pension Plans. The Office of the Superintendent of Financial Institutions.