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A Pension Fund Consultant’s Perspective!

“Corporate load”, is what corporate governance feels like at times. Just the sheer volume of paperwork, documents, records, and files that need to be put together are an overwhelming commitment for some. It need not be like that though.

But, what is corporate governance?

Corporate governance, with reference to pension funds, refers to the way in which pension funds are governed, and to what purpose. It identifies who has power and accountability, and who makes decisions. It is, in essence, a toolkit that enables the board to deal more effectively with the challenges of running a pension fund. Corporate governance ensures that pensions funds have appropriate decision-making processes and controls in place so that the interests of all stakeholders, specifically its primary key stakeholders – the members, and those of others like the regulator, the employer, the environment, and society at large, are balanced.

Put simply, corporate governance is the system of rules, practices, and processes by which a pension fund is directed and controlled. Of course, it would not be that burdensome if it were plainly that simple. Corporate governance at a fund level includes the processes through which a fund’s objectives are set and pursued in the context of the financial, social, regulatory, and market environment. It is concerned with practices and procedures for trying to make sure that a fund is run in such a way that it achieves its objectives, while ensuring that stakeholders can have confidence that their trust in that fund is well founded.

Different Global Codes, Same Purpose

While different schools of thought point in different directions on what necessitated the introduction of corporate governance as a concept and practice, it is universally accepted that, for as long as the principal-agent problem has existed, corporate governance has been of essence.

The King IV Code on Corporate Governance, which is recognised as one of the world’s leading corporate governance codes, sets out principles and recommended practices that any organisation, pension funds included, must follow. It posits good corporate governance as a relentless pursuit of four outcomes – ethical leadership, effective control, good performance, and legitimacy.

There are two other schools of thought we subscribe to too on all-matters-corporate-governance – and they are, the Organisation of Economic Co-operation and Development (OECD) Guidelines for Pension Fund Governance, and the ISO 37000 Guidance on Governance of Organisations. Needless to say, we are strong advocates of our own industry guideline too, the “Risk Management and Corporate Governance Guideline for the Pensions Industry”, issued by IPEC. Critical to mention here that the Guideline is not only a good-to-adopt framework, it is mandatory for every pension fund to apply.

A Board’s Decision-Making Toolkit

Corporate governance is about bringing science and structure to what would otherwise be an abstract art laden with ambiguous and fluid concepts. Good corporate governance entails putting together the decision-making infrastructure that seeks to improve the quality of the decisions made by the trustees and those to whom they delegate duties. Good quality ethical decision-making builds sustainable pension funds and enables them to create long-term value for their members more effectively.

Corporate governance is a much-required decision-making toolkit for every board – be it a board of directors, board of governors, board of trustees, or any other board for that matter. Certainly, this is more pronouncedly so in the pension fund industry where there is so much reliance by boards on advice that comes from service providers pursuing their own self-interests. A well-crafted corporate governance framework provides any board with a reference framework for guidance on who, how, and when specific decisions are made. It empowers the board with a process to follow in arriving at key decisions of running the fund. While it allows them to delegate, a sound corporate governance framework ensures that the board retains overall responsibility and accountability for all the actions the fund undertakes.

Answer to the Principal-Agent Problem

Trustees are no pension fund management experts, and there is no requirement that they be, and yet those that advise them are, or at least purport to be. A fool-proof corporate governance framework ensures that the heavy advice-consuming trustees are clear of the power, authority, and accountability they carry. More importantly, it ensures that they are comfortable with discharging that power – providing decisive leadership in a service-provider-dominated environment.

It is no secret, trustees feel overwhelmed at times with the advice they receive from service providers. To borrow from the words of one trustee, “trustees feel decapacitated” at times. With no structure to guide them on how to arrive at a decision, they are disempowered, and are left at the mercy of the very same “self-interested” service providers for more advice on what decisions to take. “Nothing wrong with that”, some would say. Of course, maybe not, but the principal-agent problem would not be such an ancient perennial headache for many if it was not generally accepted that if left unchecked, agents are more likely to put their own interests first ahead of those of their principals.

Ideally, at the very minimal, one would want the board to be able to competently assess the quality of advice it receives. Board composition and structure is one key aspect of corporate governance. It speaks to how the board is made up in terms of the combination of knowledge, skill, expertise, and experience of the different board members.

Alignment of Interests

The pension fund industry is one of the few industries where the customer is a dual stakeholder – a consumer on the one hand and a shareholder on the other – and yet they have not been given the voice or authority to dictate how they are served. They are failed on both fronts – no “consumer sovereignty” privileges, and no shareholder power or authority to unleash with easy. Key decisions are made, on their behalf and in their absence, on very pertinent matters that will ultimately determine their lifestyle when they are no longer economically active. It is difficult to think of anything else that can act as a pillar of hope, and a source of comfort and confidence, that those decisions will be in their best interests, other than a robust corporate governance system.

In pursuit of what is in the best interest of members, it is time we have proper contracts of engagement between trustees and members – with clear terms on roles, responsibilities, key performance areas, and a well thought out performance-based remuneration structure. Such practice would ensure that trustees are held to account by the members as their primary stakeholders. Trustee remuneration gives real power and authority to members over those responsible for overseeing the management and administration of their retirement savings. Structuring the remuneration on a performance-based fee model would also ensure that the interests of the trustees are more directly aligned to those of the members.

Some would ask, how can we be advocates of “fees must fall” and yet be standing up for the introduction of what would certainly be an additional layer of fees at the same time. Our view is that there are certain costs that are worthy incurring – and trustee remuneration is, no doubt, one of them. Let funds incur this specific cost, and the rest of the costs will be taken care of as trustees fight to keep all other costs low, as not doing so will impact negatively on their own performance-based fees.

First Line of Defence

Should anything go wrong in the management of a pension fund, it can be expected that the first point of interest for the regulator and the courts would be the corporate governance structure of the fund. Potential for trustees incurring personal liability is very real nowadays. However, where a well-crafted corporate governance structure can, not only be demonstrated but also shown to have been applied diligently, it can be expected that there would be some degree of lenience to be expected from the authorities. Certainly, having a robust corporate governance framework, and applying it in letter and spirit, is a sure firewall against most litigations that could potentially be brought against the fund, the board, or the trustees in their individual capacities.

On the other hand, a regulatory requirement for trustees to have professional indemnity cover would be an indirect, and yet very effective, way for pension funds to improve their corporate governance standing. Insurers, in underwriting the risk, would pay particular attention to a fund’s corporate governance framework – demanding a high premium in some instances and outrightly refusing to provide cover in others. That, in our view, would force boards to improve their corporate governance practices.

A well-crafted corporate governance framework will undoubtedly help keep both errors of omission and of commission under check. Contributions will likely be received and invested on time – and into the correct investment portfolios. Benefits will be paid on time – to the correct beneficiaries’ accounts. The industry-wide unclaimed benefits book that keeps growing will be steadied. More importantly, with such a very high degree of oversight and scrutiny, outright fraud and scams are likely to be kept at bay.

The Secret is in the Commitment

One thing has been consistent up to this point. Any reference to building a corporate governance framework has been pre-fixed with the qualification that it has to be a robust and comprehensive framework. Anything else would be a mere tick-box endeavour incapable of yielding anything positive other than just overly burdening trustees.

Corporate governance frameworks should be inspirational if they are not to be burdensome. With the right guidance, putting in place proper corporate governance frameworks shifts from being grudge-compliance exercises, to real value-adding commitments. With that, corporate governance ceases to be an abstract and fluid concept, but instead a set of implementable steps that takes the guesswork out of how effective decisions are made.

Institutionalising corporate governance is not a once off event, but an incremental process with lots of iterations. We caution trustees against the edge to do everything all at once. That is overwhelming. We further make the emphasis that corporate governance should not be seen as an input-based, to-do-list-focused exercise. Rather, it should be viewed as an outcomes-based pursuit. Good corporate governance is about discipline – the discipline to, not only put in place an enduring decision-making framework, but to also always be obediently guided by it once it is in place.

Our fear is that, in surface-level compliance with the regulatory requirements, many a funds will have a framework of sort in place, but few will craft and adhere to the actual provisions of a sound governance framework. One hopes that, in the end, regulation will prevail to the point of getting boards to adopt good corporate governance into a culture they live by. While we do not believe that governance should be overly regulated, what is at stake here compels us to support what needs to be done to get the industry on track. On the other hand, trustees also need to be reminded that the world only sees governance through the lens of what has gone wrong – if a fund is doing well, no one bothers, and the board is great. The moment something goes wrong, then suddenly the board is a bunch of crooks and they must go.


Contrary to many views out there, corporate governance is not a metaphysical concept of organisational psychology. Instead, it is a performance issue anchored on a science and process-based approach to leadership effectiveness for achieving clearly defined outcomes.

As we grapple with improving the odds of getting more members to retire more comfortably, we need to ensure that any such efforts are built on a solid foundation – that of a robust corporate governance framework.

Our monthly publication is aimed at inviting conversations from like-minded individuals with a view to engaging in forward-thinking-led discussions on how we can collectively improve the state of our industry.

This document provides information of a general nature and does not constitute advice in respect of a particular client. For any specific advice requirements, please contact the authors.