Getting pension fund governance right

By JOSPHAT MURIUKI More by this Author

The value of pension fund assets has grown tremendously over the last two decades currently hitting Sh1.54 trillion from Sh44 billion in 2000. This growth supposes that the

typical scheme has shifted from placing all its investments in government securities to active investment management.

Besides, the volume and complexity of compliance and regulatory framework has increased and significantly impacted operational and cost efficiencies, especially for smaller schemes.

Additionally, over the years, more schemes have shifted to defined contribution designs and as such, the members — not employers — bear the risk of adequacy of pension funds upon retirement.

These changes have caused increased pressure for better governance to protect members’ savings and placed a higher demand for expertise, accountability and involvement on the trustees charged with the governance of the pension schemes.

For enhanced accountability, transparency, operational efficiency, and regulatory compliance, the Retirement Benefits Authority (RBA) has set out the best practice that schemes can use to base their own governance structure.

Coupled with the general principles of corporate governance such as inclusivity, accountability and transparency, attention has been given to audit, board evaluation, training and induction.

In my opinion, there is no one-size-fits-all governance arrangement. Good governance is the extent to which a scheme aligns the board of trustee activities with members’ interests.

It is about placing motivated, knowledgeable and skilled trustees and having the right structures and processes to enable effective, timely decisions and risk management to steer scheme objectives.

Primarily, the board should be made of trustees with the necessary expertise and knowledge of the pensions business who also have good integrity and ethics.

At least one member should have a financial qualification. It should operate independently but encouraged to interact vibrantly. If a board is to truly fulfill its mission — monitor performance and provide connections with the bigger world — it must become a robust team — one whose members know how to ferret out the truth, challenge one another, and even have a good fight now and then.

The issue of board governance is continually evolving and there’s always something new to learn about it.

The transformation in both social and demographic space commanded by ICT innovations continues to pose a grave need for expanding understanding of the pensions sector.

Although trustees bring some familiarity about governance practices with them, there is a need for continuous training and induction to maintain the right degree of expertise in the boardroom.

Regardless of how much board experience a board member has, it’s unrealistic to assume that anyone has a full and complete understanding of governance. For instance, they should be on track with emerging issues that affect all organisations like cybersecurity, the pandemic, social, economic and political issues.

In fact, the RBA’s Good Governance Guidelines (2018) require that by policy, trustees should constantly seek to enhance their knowledge and skills through training. Between meeting protocols, board reports, resolving hitches, and strategising for the future, board members classically have a full plate and education may often fall to the back burner.

While all those things are important, they don’t impede the board’s responsibility for ensuring that all board members have the knowledge and leadership skills to reliably run the pension scheme.

The board chair could make or break the organisation.

A good chair provides effective leadership not for the scheme but for the board, enabling it to function as the highest decision-making body in the organisation.

Experienced chairpersons engage board members to address their concerns, provide them an enabling environment and encourage them to stay motivated and productive. They are authoritative and humble, committed and detached, have a helicopter view but land it from time to time to get to know the landscape, and the troops.

Lastly, blend the board into the pension scheme members through annual general meetings (AGMs).

These meetings drive good governance by ensuring members exercise their rights in monitoring, questioning, and voting in the meeting to guarantee trustees act in the scheme’s best interest.

It gives members an opportunity to receive copies of the scheme’s financial records, review fiscal material for the past year and ask questions concerning the directions the trustees want to take in future. It is a way to embed the value of members voice into the overall scheme strategy.

Additionally, the AGM gives its members, the sponsor and the board of trustees a broad overview of the organisation’s current directions, financial health and confirms its purpose.