Our pension system rests on the premise that the sponsor — typically a single employer — bears most, if not all, of the risks associated with the pension promise. This assumption logically entails the conclusion that the sponsor alone should control plan governance. But unilateral sponsor governance produces its own further conclusion: that the state should regulate the governance process in order to protect members from possible abuses of power by the sponsor. In recent years, however, the centre of gravity in the debate over risk-bearing has shifted. It is now widely — though not universally — accepted that plan members bear some risks as well, whether because they have forgone wages, made matching contributions or stand to lose if the plan falters or fails. The dominant model of unilateral sponsor governance has shifted as well. Some 60% of all plan members and 70% of defined benefit (DB) plan members are now enrolled in plans in which their representatives participate in or control the governance process. Accordingly, it is time to consider whether the main thrust of state regulation should shift, too — from preventing the sponsor’s abuse of power to ensuring that governance is conducted openly, honestly and competently.
That said, some 30% to 40% of plan members are still enrolled in single-employer pension plans (SEPPs), most of these plans are governed by the sponsor, the “old” governance issues persist, and so does the need to better understand the dynamic relationship — the synergy — between governance and regulation. In the next section I explore this synergy; in the section following, specific governance issues common to all plans; and in a concluding section, new or enhanced governance models, which provide for the participation of representatives of active and retired plan members.
8.2 The Synergy between Regulation and Governance
8.2.1 Single-employer pension plans
My discussions with stakeholders have left me with the impression that some SEPP sponsors and unions have not yet engaged constructively with governance issues. For the stakeholders, the “bottom line” is whether the pension promise will be kept — not by what means or process or with whose knowledge, consent or participation. This focus is perhaps understandable. Both employers and unions are struggling with difficult economic challenges. They see the investment of precious time and scarce resources in better plan governance as a distraction from their core preoccupations — a distraction, moreover, that in their view is unlikely to produce meaningful or positive outcomes. But failure to address governance issues may, in the end, not only disserve labour and management but derogate from the achievement of regulatory objectives.
Plan failures, for example, are often and fairly characterized as sponsor failures, and sometimes as regulatory failures. But they could equally be described as governance failures. If governance were more transparent and participatory, if member representatives were made aware of and given some voice in decisions about contributions, investments and benefit structures — and assumed a share of responsibility for the outcomes of those decisions — they might suggest approaches that would avert disaster, alert the regulator if a need for intervention should arise, or devise least-worst outcomes for their members and retirees. Greater transparency, even in employer-administered plans where no union is present, might have the same positive consequences as in other consumer contexts: members would become alert to the dangers, could seek timely assistance from a lawyer or the regulator or begin to rearrange their affairs.
Sponsors, too, would profit from improved governance practices. For example, best-practice benchmarking would enable pension plans to evaluate their own practices against those of pension plans across the system. This is hardly a novel suggestion. Benchmarking is a legitimate, well-tested and widely used aid to decision-making in other domains of corporate governance, but in the pension world is confined to a narrow range of issues and remains a largely private exercise — a service offered by consulting groups to their clients. It is not employed to its full potential as it could be if undertaken by the regulator with data collected and made publicly available across the pension system. Thus, SEPPs would be encouraged to compare themselves not only with larger or smaller counterpart plans, but also with multi-employer plans (MEPPs) or with jointly sponsored pension plans (JSPPs) in relation to investment management expense ratios, asset selection and returns, administrative costs, levels of service to members and retirees and other indicators of plan performance. Such comparisons might prompt a given SEPP sponsor to consider a change in plan design, investment strategy or service providers with a view to improving returns, reducing the costs of administration, lowering its contributions or improving benefits.
For benchmarking to work well, standard data must be collected not just from plans that choose to participate, but from all plans; and it must be analysed by competent and disinterested experts. While private consultants can and do provide useful benchmarking services, it would be much more efficient for the regulator to undertake regular and comprehensive benchmarking to a greater extent than it does now. Once the regulator uses the data (much of which it already collects) to develop and deploy benchmarks, a new dynamic comes into play. The regulator is now in a position to “nudge” sponsors into improving their approach to plan governance. Senior corporate managers, many of whom are not directly involved in plan governance, may be prompted to take a greater interest in the plan in order to ensure that plan administrators are developing strategies to improve their performance ratings. The company’s directors and shareholders may also become engaged with governance as well as funding issues; if a plan is underperforming, they can ask management awkward questions and insist on a new approach. And plan members (and their union, if any) might become, as suggested, informed and empowered “consumers” who can raise objections and make suggestions either within formal governance structures if they are represented there, or outside them if they are not.
To sum up: more transparent plan governance can lead to better plan performance. The regulator’s contribution to better governance is to ensure transparency, to provide expert analysis and to make the benefits of both available to stakeholders. The contribution of both professional and representative actors in the governance process is to ensure that they take advantage of transparency to secure better pension outcomes.
Recommendation 8-1 — The regulator should establish benchmarks or performance indicators covering the broadest possible range of governance issues, including funding, benefits, expense ratios, administrative costs and service to members and retirees. Plan administrators should provide, and the regulator should collect and analyse, data relevant to these indicators.
The results of this exercise should be made publicly available so that sponsors, administrators and beneficiaries can evaluate the performance of their plans as against the performance of specific comparator groups and of the whole system.
The role of unions in plan governance is a closely related issue. Unions have bargaining relationships with sponsors whose workers comprise some 70% of all plan members and 80% of DB members (but only about one in three SEPP members). In many workplaces they have been instrumental either in persuading employers to establish a pension plan or in embedding previously established plans in their collective bargaining agreement. In either case, through collective bargaining, unions have the opportunity to influence various aspects of the plan, including its design, funding and benefits.
However, the adversarial, one-minute-to-midnight atmosphere of collective negotiations is sub-optimal for working through complex, technical pension issues that often require lengthy time horizons for their resolution. Indeed — as some stakeholders reported — pension decisions taken at the bargaining table are sometimes made with little or no information about the plan. Moreover, the plan itself is not represented in the negotiations, so there is a risk that pension concerns may be set aside by the principal parties if seen as impeding the settlement of more immediate, comprehensible and controversial issues.
While issues relating to overall pension costs must be dealt with in the context of comprehensive collective negotiations, some technical or administrative pension issues could sensibly be taken off the table and remitted to the body responsible for plan governance, where labour and management representatives can examine them with greater care, better information and less pressure. But what if there are no union or member representatives on the plan’s governing body? Under Ontario labour law, employers are under a duty to bargain in good faith concerning any matter that a union chooses to place on its negotiating agenda — including the governance of a pension plan. If negotiations fail to produce agreement, the union may strike to achieve its goals. Thus, unions have available the means for securing a greater role for themselves in the governance of pension plans — if they care to use it. In some contexts, especially in the public sector, employers have agreed to involve member or union representatives directly in governance. For example, JSPPs — all in the public sector — are by definition committed to a model of shared governance; by contrast, university SEPPs, in the broader public sector, are generally administered by the governing body of each institution, with member or union representation, if any, confined to committees. In the private sector, shared governance arrangements vary considerably. At one extreme — in construction sector MEPPs, for example — employers have ceded complete control of the governance process to unions. At the other — in a large number of SEPPs involving, however, a distinct minority of unionized plan members — union or employee representatives still play no formal role at all in decision-making.
There are many possible explanations for this situation. Employers may adamantly insist on maintaining unilateral control of the plan; unions may lack the bargaining power to back up their demands for a share in plan governance; and constituencies within the union may insist that it address pension issues other than governance. However, I have the impression that a significant number of unions and union decision-makers simply do not want to get involved in governing pension plans. That is their decision, of course, but the consequence is that the regulatory process may sometimes be called upon to resolve issues that otherwise could have been resolved through plan governance procedures in which workers would have an effective voice.
This is not to say that all decisions arrived at through collective bargaining — or through joint governance structures based on collective bargaining — will inevitably arrive at the right balance among benefit security, affordability for the sponsor, and pensions that are adequate for retirees.
For example, flat benefit plans — widespread in the manufacturing and mining sectors — are typically employer-administered SEPPs, often established under collective agreements. Contributions are a fixed sum per hour worked; and benefits are a fixed or flat monthly sum per year of service. Since benefit levels are often revised upwards in tandem with increased wages, significant commitments for the past service of present plan members are added to the plan’s liabilities in each round of bargaining. The result, according to FSCO data, is that flat benefit plans have the lowest median solvency funding ratio of any type of plan and, for that reason, one might infer, they attract (or should attract) a disproportionate amount of regulatory attention. In my mind, this raises three questions. If union or member representatives were more often involved in the administration of these plans, would they come to better understand their inherent limitations? If they were to accept a greater share of responsibility for governance decisions, would they make greater efforts to ensure that plans were better funded? Should the regulator continue to be responsible for ensuring that plans are adequately funded if the parties have neglected to do so?
Another example: unions are legally entitled to negotiate on behalf of all workers in the bargaining unit, but not former unit members who are now retired. Of course, some unions feel their responsibilities to retirees keenly, and make efforts to protect retirees’ interests by seeking inflation protection and other improvements. On the other hand, as democratic institutions, unions must ultimately pursue the goals favoured by their current, voting members — who in most unions do not include retirees. Unfortunately, at times the interests of retirees and current members clash. For example, should the union bargain for — and strike for — higher wages for active plan members or indexation for retirees? Since retirees are denied a voice and vote in most unions, they have little opportunity to influence the union’s position. The obvious questions: Who is responsible for ensuring that retirees are treated fairly? The union? The sponsor? The regulator? Those responsible for plan governance? Principles of good governance require that the interests of all classes of plan members be considered. Hence, the final question: Should retirees not have the right to a role in governance so that they can speak on their own behalf?
In the end, the issue is whether decisions taken by plans with representative governing structures, reinforced by and embedded in properly functioning collective bargaining relationships, should be allowed a larger margin of discretion by the regulator than plans that lack such structures. Within limits, I am generally sympathetic to this position. Elsewhere in this report, I indicate how this might be accomplished.
Recommendation 8-2 — Unions should be encouraged to negotiate both the major substantive elements of pension plans arising out of collective agreements and the governing structures of such plans. The regulator should accord plans with joint governing structures a greater margin of regulatory discretion than would be available to plans lacking such structures.
As a corollary, unions should prepare themselves to discharge these important governance functions in a responsible manner and at a high level of competence.
Recommendation 8-3 — Unions that seek and accept a role in plan governance should be encouraged to ensure that both active and retired members have a voice in decisions that affect them. Unions should also develop the technical and analytical capacities necessary to support effective member participation in plan governance.
This latter requirement may well prompt collective or cooperative efforts by unions, perhaps in the form of a province-wide union-affiliated “pension centre,” which could undertake research, provide expert advice to individual unions and perhaps train staff and educate members. Such an effort might in turn lead to a consolidation of small, single-employer plans, for reasons and in ways that are discussed in Chapter Nine. If so, regulatory objectives will have been advanced by the adoption of improved governance arrangements.
Finally, in the two-thirds of SEPPs that are not unionized, and in which member participation in governance is difficult to implement and less likely to occur, the regulator will have to continue to monitor the sponsor’s administration of the plan with appropriate vigilance. A number of suggestions in this regard appear below.
8.2.2 Multi-employer and jointly sponsored pension plans
MEPPs and JSPPs both begin from the same point of departure: plan members bear significant risks and should therefore have a considerable say in the governance of their pension plan. As noted in Chapter Four, these governance arrangements have been instituted in parallel with provisions relating to funding and/or benefits, which differ from those of SEPPs.
MEPPs are funded by a standard contribution per hour worked for each participating employer (and sometimes by member contributions as well); contributions and service credits are consolidated in order to calculate the member’s pension entitlement. In the event that the plan has insufficient funds to pay members their accrued or promised benefits in full, benefits may be adjusted both prospectively and retrospectively. This last feature — which involves a clear shift of risk from sponsors to members — is crucial. Its logical corollary is that both active and retired members should have the right to participate through their representatives in making decisions about benefit reduction, as well as other governance decisions.
The Pension Benefits Act (PBA) requires that member representatives must constitute at least 50% of the body charged with governing the plan. However, in fact, many MEPPs are governed entirely by member representatives — typically appointees of the union that negotiated the plan. Unilateral control, of course, leaves MEPPs open to possible abuses of power similar to those that were seen to justify a high degree of regulatory vigilance in the case of sponsor-administered SEPPs. Where SEPPs may run the risk of confusing plan interests and employer or corporate interests, MEPPs may run the risk of confusing union interests with plan interests. In the construction industry, for example, some plans may be tempted to invest their funds in real estate development or infrastructure projects that generate employment opportunities for construction workers. The appropriate parameters of MEPP investment policy thus become a matter for regulatory concern for reasons similar to those that justify the prohibition on SEPPs investing in the sponsor’s business.
True, the parallels are not perfect. The trustees of union-administered MEPPs would be acting to protect the collective interests of plan members rather than those of another group — the sponsor’s shareholders. And in principle, if not always in practice, unionized workers have the right to hold their pension trustees accountable through the political processes of the union. Nonetheless, without a system of checks and balances being built into MEPP governance, the risk of abuse remains. Regulation can help to supply checks by encouraging or requiring MEPP trustees to keep members fully informed and providing opportunities for them to discuss and make key plan decisions. And they can provide balance in MEPPs by ensuring that representatives of beneficiaries other than active plan members also have a voice in plan governance. I have in mind particularly retirees whose vital interests may be adversely affected if pensions in pay are reduced by a member-only board of trustees in order to preserve the benefits of active members.
Finally, during the course of the Commission’s hearings, I heard allegations — unsubstantiated allegations, I must stress — that some MEPP trustees were receiving inappropriate perquisites of office, or using their office for personal gain. Since some MEPPs may not be subject to the same internal audit procedures and financial controls as most corporations and sponsor-administered SEPPs, such abuses are at least conceivable. It is important that if they are actually occurring, they should be brought to light and stopped. One way to stop them is to address their root cause: some MEPP trustees who serve as volunteers (some are paid salaries as union officers or staff members) may believe that they are entitled to perquisites in lieu of remuneration. It would be more transparent and conducive to accountability to provide trustees with appropriate and modest remuneration in an amount set openly by the board of trustees and reported as part of the plan’s financial statements.
All of these concerns present the same policy dilemma: should they be resolved by detailed legislation, or should MEPP and JSPP governing bodies themselves be encouraged or required to resolve them? As I suggest later in this chapter, in my discussion of the conflict of interest issues confronting SEPPs, the answer is probably a combination of both.
Recommendation 8-4 — Multi-employer and jointly sponsored pension plans should develop governance policies that ensure participation of representatives of both active and retired members in their governance, establish the means of selection of those representatives, fix their remuneration and lay down rules governing their conduct in office.
Recommendation 8-5 — Multi-employer and jointly sponsored pension plans should provide annual statements to all active, deferred and retired plan members, which include:
- a statement of the plan’s current funded status;
- a reminder that benefits provided under the plan are not defined or guaranteed but subject to reduction while the plan is ongoing (in the case of multi-employer plans) or on wind-up (in the case of jointly sponsored plans);
- disclosure of any known events likely to lead to a reduction in benefits; and
- an indication of any procedure or formula specified by law or in the plan documents by which benefit reduction may be determined.
Recommendation 8-6 — Multi-employer and jointly sponsored plans should develop and abide by investment rules that prevent self-dealing either by the union that has negotiated them or by plan trustees.
Recommendation 8-7 — All policies, statements or reminders required by current law or provided by multi-employer and jointly sponsored plans pursuant to these recommendations should be communicated to plan members and beneficiaries and filed with the regulator. The regulator should have the power to sanction violations of both statutory requirements and plan policies.
JSPPs, which presently account for 35% of active DB plan members, represent a distinctive response to the proposition that the sharing of risks necessarily implies the sharing of governance responsibilities. As their name implies, the distinguishing feature of JSPPs is that both employers and workers must sponsor — “contribute” to — a DB plan, and both are “jointly responsible” for its governance. (However, while regulations specify that members must not contribute more than the employer, no minimum contribution is specified, and while members must be “jointly responsible” for governance, no specific governance structures are mandated.) The fact that all existing JSPPs are in the public sector or broader public sector, and all but one of them is a MEPP, reflects their historical origins — not the legal requirements for their establishment. In principle, any private sector MEPP or SEPP could become a JSPP by meeting the minimum conditions in the regulation, and any JSPP could choose to convert itself into a “pure” MEPP or a SEPP.
There are many attractions to JSPPs. For example, because the parties share responsibility for funding the plan, proposals to increase benefits require that both look carefully at how these will be paid for and whether they will be proposed for this purpose. Both parties also have an interest — a direct and considerable financial interest — in ensuring that governance decisions are taken on the basis of the best available information and professional advice. In short, the sharing of funding responsibilities may lead not only to the sharing of governance responsibilities, but also to improvements in the quality of governance decisions and, ultimately, in the funded status of plans. Finally, of course, the large size of JSPPs also contributes to their success, for reasons explored in Chapter Nine. The strategy of encouraging large plans (proposed in that chapter) may well lead to the creation of new JSPPs or the acquisition of new members and functions by existing ones.
If and when these plans become more numerous, extend into the private sector, and acquire even more members than at present, they too may reveal special governance problems that are not now obvious. For now, it is sufficient for me to suggest that JSPPs may be ideal candidates to test the proposition that enhancements in plan governance should make possible a relaxation of regulatory requirements.
8.3 Promoting Good Governance
8.3.1 The importance of good governance
Pension governance and administration require the making of difficult and sensitive decisions. In this section I propose to make the case that good governance enhances the chances of getting these decisions “right” and thereby contributes to the health of individual plans and the stability of the pension system as a whole. Conversely, if funding decisions are based on insufficient knowledge or information, and taken without due care for the interests of the plan and plan members, the result — as many studies have shown — is likely to be poor plan performance.
As I suggested in Chapter One in my enumeration of the principles underlying this report, good governance and good administration require that participants in administration should be prudent, honest, knowledgeable, efficient and successful.
8.3.2 The elements of good governance
The classical trust doctrines — which are adopted, codified and translated into contemporary language by the PBA — use “prudence” as a shorthand term to encompass all the other elements of good governance and administration. Accordingly, I will deal with “prudence” first.
Prudence is a fundamental, indispensable characteristic required of anyone who assumes the responsibility of acting on behalf of another. The PBA states quite plainly that plan administrators are required to “exercise the care, due diligence and skill in the administration and investment of a pension fund that a person of ordinary prudence would in dealing with the property of another person.”
Or perhaps too plainly. Administrators of Ontario’s pension plans are no longer simply “persons of ordinary prudence,” as perhaps they once were. Indeed, they are usually not persons at all, but rather large corporations whose “prudence” has been elevated to an altogether higher level by their ability to mobilize staff, consultants and advisors, to develop and deploy analytical systems, and to make full use of information sources to produce decisions that are wiser than “ordinary.” That is why the PBA requires that they must use “all relevant knowledge and skill that the administrator possesses or, by reason of the administrator’s profession, business or calling, ought to possess.” And that is why administrators are specifically authorized to “employ one or more agents to carry out any act required … in the administration or investment of the fund” — and why agents are made subject to the same standards as the administrator that employs them.
Not only have the identities and capacities of plan administrators changed; so, too, have expectations within the pension community of the variety of investment or other decisions that might “prudently” be made. This has become evident in the debate over the quantitative investment rules adopted under the federal Pension Benefits Standards Act (PBSA).
In Chapter Four I recommended eliminating, modifying or replacing some of those rules, which restrict investment in certain Canadian companies but not those in their foreign counterparts. In this chapter, I focus especially on the so-called 30% rule, which inhibits the right of plan governing bodies and pension administrators to adopt an active investment strategy that includes the private placement of pension assets to acquire dominant positions in large enterprises in Canada and abroad. It is widely, if not universally, believed that only such a strategy will enable some plans to meet their obligations over the long term. If this is true, more conservative investment strategies may not be as “prudent” as more aggressive ones. However, administrators are presently prohibited from investing plan assets in the securities of any corporation in which they would control more than 30% of the voting shares. This restriction, if rigorously enforced, would place pension plans in the position of being unable to exercise influence over corporate decisions in the same way that other investors with comparable holdings routinely do. Consequently, some large, well-managed and presumably prudent pension plans routinely circumvent it.
I believe that under certain circumstances, plans should be able to claim exemption from the 30% rule. If plan members or their representatives are able to control the actions of the administrator through significant participation in plan governance, they should be allowed — within limits — to define the extent of risk they are prepared to tolerate. And if a plan administrator possesses the capacity to make complex and consequential investment decisions that require active rather than passive participation in corporate management, the scope of “prudence” should be expanded accordingly. Capacity, for reasons set out in Chapter Nine, is often related to plan size, access to expert staff, outside advisors and other resources.
To avoid any misunderstanding, the right to be relieved of the 30% rule should be available only to plans that meet both conditions — member participation and administrator capacity, as outlined above, appropriate to the kinds of investments contemplated. Which plans meet those conditions will have to be spelled out in greater detail in implementing regulations.
Recommendation 8-8 — Any plan with some recognized form of joint governance and with the requisite capacity to make complex investment decisions (as defined by regulations) should be allowed to adopt a resolution claiming an exemption from the 30% investment rule. The resolution should be filed with the pension regulator and have effect upon filing, unless and until it is successfully challenged.
From time to time pension plans have been the victims of theft or fraud. Such conduct is so obviously wrong that it requires no detailed analysis. Plans and plan members should be protected against it; administrators, trustees or service providers who are guilty of such conduct should be removed from any connection with the plan and punished in accordance with the general law.
However, in the present context, “honesty” has a somewhat different connotation. Participants in the governance process have a duty to serve the plan with undivided loyalty; failure to do so can be described as not acting “honestly” toward the plan. Unfortunately, as I have gathered from many stakeholders, the roles of some key actors in pension governance are ambiguous so that their duty to the plan is not clearly defined. The result is that they routinely engage in conduct that an objective observer might regard as involving a conflict of interest. Such conflicts are best described as systemic or structural and generally do not involve any personal impropriety.
The best way to deal with these conflicts is, therefore, to improve the system of plan administration and redesign the structures that may distort it. This amounts to a suggestion that pension plan administration should be conducted at arm’s length from the sponsor’s business. I appreciate that making this a legal requirement might represent such a departure from the prevailing arrangements as to risk destabilizing the whole SEPP system. On the other hand, the experience of JSPPs, which exemplify the arm’s-length approach, reminds us that free-standing plans can not only avoid conflicts of interest, but can become large, well-managed, focused in their concerns and highly successful. I develop this idea further in Chapter Nine.
Three systemic or structural conflicts attracted particular comment: the SEPP employer as both sponsor and administrator of the plan, the plan member/union official as trustee in a MEPP or JSPP, and the actuary as professional advisor to both the sponsor and the plan.
In many SEPPs, the employer acts as both sponsor and plan administrator. As sponsor, the employer has an obligation to maintain the plan only so long as, and to the extent that, the corporation’s business interests are served and its legal obligations are discharged. Thus, the limits of the sponsor’s duty are to contribute funds, as required by the PBA, sufficient to keep the pension promise. However, as administrator, the employer is an agent of the plan and thus owes it fiduciary duties, including the duty to ensure that it is as solvent as possible, that it receives high-quality, independent advice from professional advisors, and that the interests of plan members are protected to the maximum extent possible.
How might these duties conflict? For example, the administrator of a mature plan may accept that the best way to match its assets to its liabilities is to invest in low-yield, fixed-return, but very safe investments. However, to do so would be expensive and would require much higher contributions from the sponsor than an investment strategy that featured potentially high-yield but also high-risk equities. How can a plan administrator who is also a senior officer of the sponsor corporation make a choice — or, more likely, strike a balance — that does full justice both to the plan’s interest in enhanced security and the sponsor’s interest in keeping down costs? Another example: I mentioned in Chapter Four the difficulties sometimes encountered by chief financial officers in administering their company’s pension plan in-house while continuing with their other demanding executive responsibilities. This is another instance of what I have called structural or systemic conflict of interest: the logic of corporate governance obliges them to attend to responsibilities that — according to the logic of plan governance — they are not appropriately positioned to perform.
Active plan members who serve as trustees of MEPPs or JSPPs face comparable contradictions. For example, if a JSPP is under-funded, a union-nominated trustee might sensibly recommend that contributions by both parties be increased — but this might run counter to the same individual’s ambition as a union officer to persuade the company to raise wages or improve benefits at the next round of collective bargaining. Another example: in a MEPP, under-funding may require benefit reductions for active plan members, retired members or both. This places the trustee in the position of voting on whether his or her own benefits will be reduced or whether someone else should bear the pain.
To some extent these conflicts are unavoidable so long as member representatives sit on the plan’s governing body. However, they can be mitigated in one of three ways. The first is to ensure that representatives with differing interests are appointed as trustees. Thus, the presence of retired members on MEPP boards and of employers on JSPP boards will, or should, ensure that systemic conflicts cancel each other out to some extent. The second is to appoint non-beneficiaries as trustees. These might include officials or retired officials from different unions, or practising or retired pension professionals. And the third is to pre-empt or lessen conflicts by adopting formulaic rules. For example, if MEPP plan documents were to require pro rata reduction of benefits for both retirees and active plan members, as I have proposed, the conflict need never arise.
Recommendation 8-9 — Plan sponsors who administer their own plan should be encouraged to reduce or eliminate inherent conflicts of interest by:
- ensuring, so far as possible, that those assigned to the role are given an unequivocal mandate to act in the best interests of the plan;
- providing representation for members and/or retirees and/or independent members on the plan’s highest decision-making body; or
- retaining arm’s-length professional advisors to administer the plan on their behalf.
Recommendation 8-10 — Plans that appoint active or retired members to serve on their governing bodies should be encouraged to resolve potential conflicts of interest in advance by:
- adopting clear policy statements in the plan documents;
- ensuring the significant representation on those bodies of groups with divergent interests; or
- appointing some trustees or governors unaffiliated with any group whose members are covered by the plan.
I appreciate that all of these recommendations represent a challenge to current governance practices in many plans. Nonetheless, versions of them are already adopted voluntarily by some plans in Canada and elsewhere, and in some jurisdictions. It seems sensible that plans be given an opportunity to experiment with the solutions that work best for them before these recommendations harden into requirements imposed by law.
Recommendation 8-11 — The Pension Champion, proposed in Recommendation 10-5, should work with stakeholders to identify approaches to the resolution of conflicts of interest appropriate to their particular circumstances.
The third instance of a possible conflict of interest — one mentioned frequently by stakeholders — relates to the role played by actuaries in the governance process. Actuaries may be engaged to advise both the employer/sponsor and the plan administrator. In this dual capacity actuaries may find themselves performing ambiguous, if not conflicting, roles. To which client is the actuary ultimately accountable? Is the point of a valuation to maximize plan security or to indicate to the sponsor how contributions can be kept to the absolute minimum permitted by law? Does the actuary provide advice or merely information to his or her clients?
Ambiguity and conflict are most often encountered in the course of performing actuarial valuations when the actuary has to take account of a range of variable or discretionary factors — especially the discount rate — thus providing a range of choices to the sponsor. The breadth of the options offered should be influenced by the actuarial firm’s desire to serve both “clients,” though many see one of those clients — the employer/sponsor — as having the greatest influence over the actuary.
Of course, the actuary’s discretion — and hence potential exposure to conflict — is not infinite. Actuarial valuations must by law be conducted in accordance with professional standards set by the Canadian Institute of Actuaries (CIA) and adopted by reference under the PBA. Those standards are currently being revised by the CIA in ways that structure and confine actuarial discretion. And as mentioned in Chapters Four and Seven, the CIA has recently sanctioned one of its members for failing to conform to its standards. All of these developments will doubtless help to reduce the possible effects of the structural or systemic conflicts experienced by actuaries. On the other hand, none is as far-reaching as the requirement in the United Kingdom that the plan and the sponsor must each retain its own actuary unless otherwise agreed — a division of responsibilities similar to that already required in this province for accountants and auditors.
The inherently conflicted role of the actuary has given rise to another problem. If actuarial advice negligently or otherwise induces or permits sponsors to under-fund a plan, there is a risk that the plan, or its members, may sue for any loss suffered as a result. A successful lawsuit would likely involve the imposition of sizeable damages — a prospect that has made it difficult for actuarial firms to insure themselves against this possibility.
As a result, most actuaries assume that a valuation merely provides “information” to the sponsor, on the basis of which — along with other factors — the sponsor decides how much to contribute to the plan; inadequate contributions are therefore the sponsor’s responsibility, not theirs. This description of the actuary’s role is difficult to square with the fact that valuations are mandated by statute not just for the sponsor’s consideration, but in order to alert the regulator to any potential problems, to protect the interests of active and retired plan members and, parenthetically, to safeguard the interests of the Pension Benefits Guarantee Fund (PBGF) — which may be called upon to make good the consequences of plan failure. I am, therefore, not persuaded by the argument that actuaries provide mere “information” or that they provide it only to the sponsor. If that “information” is not “fit for purpose,” if it is based on a methodology that contravenes statutory or professional standards, or if it has been prepared negligently or improperly influenced by the primary client — the sponsor — to the prejudice of others whose interests are consequentially affected, the actuary should be made to answer for those consequences.
“Answering for the consequences” leads me to another concern. I was told that it is increasingly common for actuarial firms to require their clients to agree to indemnify them in the event they are sued by third parties, and to exculpate them from any claims by the client itself. I find this practice puzzling. If actuarial valuations are conducted with the explicit intent that they should be relied on by third parties — the regulator, active and retired plan members, and perhaps creditors or potential investors in the sponsoring corporation — insulating actuarial firms from the consequences of providing a valuation, which may have been compromised by conflicts of interest, creates a potential moral hazard.
Other professions whose members provide advice in comparable situations, and who enjoy comparable statutory monopolies over its provision, deal with the risk of third-party or client litigation in different ways: by self-insuring; by rigorous and proactive policing of their members; by providing them with education and guidance; and by establishing reasonable professional practice standards, compliance with which will shield members from inappropriate claims. (As noted in other chapters, the CIA already undertakes some of these measures.) All else failing, the legislature might be asked to define the types and limits of third-party liability to which actuaries should be exposed.
The root of all these problems, I reiterate, is not individual or collective wrongdoing by actuaries. Nor, by extension, is it illicit behaviour by other professionals, service providers or sponsors. It is that ambiguous structures and systems have been allowed to develop and to influence the way in which all these contributors to plan governance perform their respective roles. The way to put matters right is, therefore, not simply to prohibit, threaten or punish; it is to resolve the ambiguities by reforming those structures and systems.
As I noted in Chapter Four, to some extent this approach is being followed by the CIA on an ongoing basis as it seeks to reduce ambiguity in the valuation process by mandating greater transparency and consistency. Arguably, the introduction of “mark to market” accounting standards is another example of such an approach. In this chapter, however, my focus shifts to a possible complementary strategy — clearer delineation of the roles played by actuaries and other professionals in discharging their professional functions.
Recommendation 8-12 — The pension regulator and/or the proposed Pension Champion should initiate consultations with stakeholders and with representatives of the relevant professional governing bodies in order to ensure that their members provide services in the pension context in a manner consistent with the good governance and proper regulation of pension plans.
These consultations should focus on rules governing the conduct of professionals in pension practice, and on the redesign of regulatory and governance structures and processes — in both cases, with a view to ensuring the honest and transparent administration of pension plans.
However, because of long-persisting ambiguities on the question, another essential component of reform must be the clear articulation of which professionals (including, but not limited to, actuaries) owe what fiduciary duties to whom.
Recommendation 8-13 — The pension regulator and/or the proposed Pension Champion should initiate consultations with stakeholders and with representatives of the relevant professional governing bodies in order to clarify:
- which participants in the governance of pension plans are bound by fiduciary duties;
- the scope of such duties;
- whether such duties can be assigned to professional advisors and agents;
- whether advisors and agents are themselves bound by the same duties; and
- whether fiduciaries, their advisors and agents can enter into exculpatory contracts and indemnification agreements in order to limit their liability to the client or third persons.
Recommendation 8-14 — Following such consultations, the pension regulator should draw up codes of best practice for the guidance of all participants in the governance process. The regulator should urge the governing bodies of professions whose members are involved in the pension field to:
- adapt this code to the particular circumstances confronted by their members;
- implement the code, as adapted, through revision of their own professional standards, if required; and
- educate — and if necessary, discipline — their members in order to ensure compliance with the new standards.
Recommendation 8-15 — All persons responsible for providing valuations, reports or other documents that are filed with the regulator, or provided to active and retired plan members, should be required to certify that all such documents have been prepared in accordance with the law and with relevant professional standards.
The net result of these consultations and regulatory interventions should be that the governance process is improved to the point where it becomes largely self-correcting.
Those charged with governing a pension plan or administering its affairs are undertaking a task of considerable complexity. Even those with a professional background in a relevant discipline — law, accounting or actuarial science — may lack detailed knowledge of the pension field. And those without such backgrounds may have difficulty in learning what they should know.
Both lay and professional participants in the governance process ought to be knowledgeable. I use these terms — “professional” and “lay” — to distinguish between those who work extensively or exclusively on pension matters and those whose contact with pensions is more episodic. Obviously, the former should be expected to have a higher level of knowledge than the latter. However, both should be as knowledgeable as they can be and as they need to be to undertake their responsibilities. Moreover, some individuals will make the transition from lay to professional status. This is particularly true of people like union staff members and corporate executives who may begin by working on the pension file as part of a larger mandate but end up being acknowledged as experts in the field.
Some stakeholders took the position that what pension board members ought to know should be expressed in greater detail than the present statutory requirement of “all relevant knowledge.” The U.K. Pensions Act 2004, for example, requires pension trustees to be conversant with all relevant plan documents, the law relating to pensions, and the principles relating to the funding and investment of pension funds. Indeed, the United Kingdom has adopted regulatory codes of practice setting out what is expected of both plans and of those who govern and administer them so as to ensure that sufficient knowledge and understanding are brought to bear on all aspects of the governance process. The United Kingdom’s effort to ensure that governing board members and other actors are provided with low cost, standardized and quality-assured training programs ought to be replicated in Ontario. Such training and quality assurance programs ought to be made especially attractive and accessible to trade unions that are going to have to expand their cadre of trained pension personnel if they are to take up the governance opportunities and responsibilities proposed for them in this report.
Fortunately, education for governing board members in Ontario is already available through programs established by educational institutions, commercial providers and unions. However, by no means do all board members participate in these programs; nor has a minimum standard of knowledge or level of training for board members been established either by the regulator or — with some exceptions — by individual plans; nor has the success of existing programs in equipping board members for their important roles in the pension system been systematically evaluated. Indeed, a number of stakeholders expressed concern that lay board members are likely to lack the capacity to participate effectively in the variety of governance roles that I recommend for them in this chapter and elsewhere in this report.
Recommendation 8-16 — An early task for the proposed Pension Champion should be to consult with pension stakeholders, relevant professional bodies, educational institutions and the pension regulator with a view to determining what lay and professional participants in plan governance ought to know about pension plans and the pension system, how they might best acquire such knowledge, and to what extent its acquisition should be a necessary qualification for service as a trustee or administrator of, or advisor or service provider to, a pension plan.
Recommendation 8-17 — Following the consultations outlined in Recommendation 8-16, the Pension Champion ought to develop standards for educational programs for all participants in pension governance. The Pension Champion ought also to determine how educational programs should be provided and at whose expense, and whether acquisition of appropriate educational qualifications should be mandatory and, if so, for the performance of what functions.
I note that considerable progress has been made in recent years in providing education and training for corporate directors. While to the best of my knowledge no study has yet demonstrated a commensurate improvement in the quality of corporate governance, it is difficult to see that the outcome could be otherwise. This example should be persuasive for the pension community.
In Chapter Nine I briefly review evidence that suggests that significant economies of scale, as well as other advantages, accrue to large pension plans. I also suggest how small- and medium-sized plans can secure some, if not all, of these economies and advantages by entering into different forms of association with each other, with large plans or with service providers. In the present context, however, I want to reiterate a point I made earlier. It is difficult for any pension administrator, or any pension governance body, to know whether a plan is efficient if it does not have benchmarks against which to measure itself. In Recommendation 8-1, I propose the means by which such benchmarks might be initiated and applied.
There are no infallible strategies that will guarantee the success of pension plans, nor indeed any “objective” ways of measuring success that can fully account for the unique and often uncontrollable circumstances within which each plan operates. However, it is essential that plans be success-oriented. This requires that governance bodies analyse the challenges they confront, develop realistic strategies to deal with them, and subject themselves to accountability mechanisms to ensure that those strategies are producing the required outcomes.
Moreover, the success of individual plans has somehow to be generalized across the system. I visualize a virtuous circle whereby plans learn how to succeed, then share what they learn with others with a view to identifying and encouraging best practice for pension plans — and finally, after a period of further experimentation and learning, best practice is consolidated, codified and promulgated as a code of best practice. The code may not have legal effect in itself, and often should not, because one would not wish to foreclose further experimentation that could lead to even better ways to do things. Nonetheless, a code of best practice would serve as prima facie evidence that plan governors, administrators and service providers had met the minimum standard laid down in the PBA: that they had used the “skill and knowledge that [they]… ought to possess by reason of their profession, business or calling.”
Recommendation 8-18 — The regulator should develop codes of best practice to guide plan governors, administrators and their agents. These codes of best practice should be based on the experience of successful plans, disseminated across the pension system and used to give meaning to the general statutory requirements for “prudence,” “care,” “diligence” and “skill.”
8.3.3 Information for plan members and their representatives
The PBA requires that plan members receive annual statements containing a great deal of plan information, though oddly, not information on the effect of the plan’s funded status on their personal pension entitlement — arguably what they most want to know. The PBA also requires that new members be given an explanation of the provisions of the plan that apply to them. Nonetheless, stakeholder groups representing plan members and retirees complained frequently about the absence, inaccessibility or incomprehensibility of information about their plan and their pension. At one level, this problem is almost unavoidable. Most pension plans — the texts that initiate them, the legal rules that regulate them — are complex, arcane and fully intelligible only to experts and professionals. It is therefore difficult even for people who are given “the facts” — triennial valuations, annual statements and the like — to know what to make of them. Consequently, many plan members and retirees simply do not read what they are given.
(A digression: The Labour Relations Act requires that the administrator of any pension plan whose members are represented by a trade union must file with the Ministry of Labour detailed audited annual statements that include a description of plan coverage; contributions made by the sponsor and members; a statement of assets and liabilities; and a record of salaries, fees and expenses charged to the plan. The administrator must make a copy of this statement available to plan members on request and without charge. My sense is that few pension experts — let alone ordinary plan members — are aware of this legislation, and that it is seldom invoked. Persons in search of information about a pension plan are more likely to ask the pension regulator to provide it, even though the present arrangements for access to such information are not user-friendly. My conviction is that all plan members, not just those who belong to unions, should have access without charge to similar information presented in a similarly convenient form. And my suggestion is that in the interests of consolidating administrative responsibility for pensions, the PBA should be amended to ensure that sponsors make available any information mentioned in the Labour Relations Act that is not already required under the PBA, and that the pension information provisions of the Labour Relations Act should then be repealed.)
Now the difficult question: If plan members and retirees often cannot understand and/or do not read the information that they are required by law to receive, why should the law continue to insist that such information be provided to them?
There are several answers to this question. The first is that more members might read and understand the information if it were provided in a more user-friendly form — in plain English and/or the dominant language of the workplace — and if it were more carefully designed to answer the questions most pertinent to them. The second is that in the event a problem arises, whatever information is provided to members may be used by the regulator, a union official or a lawyer to resolve their problems, or at least to provide a basis for further inquiries. The third is that transparency is a good in itself — a principle enshrined in consumer and shareholders’ rights, statutes and in access to information legislation.
At the very least, information required to be disclosed to the regulator should continue to be available as well to active and retired plan members, their unions or other representative organizations and their professional advisors. And the means of making information available should be improved — in particular, by providing some form of secure on-line access for those who are unable to visit the regulator’s offices in person.
Recommendation 8-19 — The regulator should make available on-line to active and retired plan members and their authorized representatives — without charge but subject to security arrangements — all plan documents as well as triennial, annual or other valuations and reports required to be filed with the regulator.
In fact, many major Ontario plans have adopted ambitious information programs. Many of the largest and newest of these plans — especially JSPPs — have websites that provide annual reports and governance statements; information on board members; statements of investment policy; proxy voting guidelines; explanations of new investment strategies; and a variety of news bulletins, fact sheets and e-magazines. Some plans carry out surveys of plan members on proposed new benefits, surplus use and other developments. While some plans restrict website access to active and retired members, others have open websites. Many also facilitate two-way on-line contact between the plan administrator and members.
On the other hand, traditional forms of communication still work well for some plans and plan beneficiaries. These include the conspicuous posting of information in the workplace, mailings, information pamphlets and annual membership meetings. The point is that every plan should have an information policy and should adhere to that policy so that active and retired members have the information they need and are entitled to.
Recommendation 8-20 — The regulator should develop guidelines and codes of best practice with regard to the provision of plan information to active and retired members in accessible form.
Even more important to members than general information concerning the plan is information pertaining directly to their own situation.
- a simple description of how pensions are funded and benefits are calculated under the plan;
- information on the plan’s funded status (including whether it is in surplus or deficit and whether a contribution holiday is in progress or contemplated);
- the potential impact of its funded status on active and retired members’ pensions; and
- a telephone number and/or website address where further information can be obtained from the administrator or the sponsor, and similar coordinates for the pension regulator.
8.3.4 Governance, funding and investment policies
The development and publication of operating policies, which outline organizational decision-making practices, is as desirable for pension administration as it is for corporate and public governance. Disclosure of this information achieves several goals: it ensures that senior pension staff and trustees will discuss how decisions are presently made in the pension fund; it requires regular review and evaluation of decision-making processes; it establishes the occasion for discussion of any necessary changes; and it promotes transparency in all aspects of pension plan administration. This last feature is particularly important because it demystifies the plan, reassures plan beneficiaries that its administration is open to new ideas and committed to improving performance, and reduces the likelihood that ill-informed rumour-based campaigns will destabilize the governance process.
In general, governance policies should reveal how board members, the administrator, senior staff, professional advisors and service providers are selected; the nature of their responsibilities; their access to ongoing training; any remuneration or perquisites provided to them; and the constraints to which they are subject, such as conflict of interest rules. Funding policies should reveal how the plan intends to make the pension promise secure, the assumptions underlying anticipated long-term approaches, and strategies for dealing with different funding scenarios. And investment policies should identify the strategy adopted by the plan to optimize the returns on its investments, steps taken to guard the plan against unacceptable levels of risk, and approaches by the plan to the selection and oversight of its investment advisors.
Under federal rules, administrators must adopt (but need not file) Statements of Investment Policy and Procedures (SIP&P) that set out in general terms the plan’s objectives in making investments. In my view, such statements should be adopted not only to facilitate investment planning, but to enable plan members to evaluate the quality of plan administration, and to enable the regulator to develop a compendium of best investment practices, which it can then use for benchmarking purposes.
Recommendation 8-22 — Plan board members, governors or trustees should prepare, file with the regulator and make available to active and retired members at three-year intervals (or more often, if material changes have occurred) the plan’s detailed governance, funding and investment policies. Particulars of the matters to be addressed by these policies should be developed by the pension regulator in consultation with the stakeholders. Template policy statements should be developed for the assistance of smaller plans.
One aspect of investment policy deserves special mention. In recent years, plan beneficiaries and trustees increasingly want to know not only that pension funds are profitably and safely invested, but also that they are invested in companies that behave as good corporate citizens should. In particular, they are sometimes keen to ensure that the leverage exercised by their plan as a significant shareholder is being deployed in support of decent social and environmental policies when these concerns are raised at annual shareholder meetings or in other forums.
It remains somewhat uncertain precisely how, in practical and legal terms, the decisions of trustees and administrators to pursue socially responsible investment (SRI) can be reconciled with their duty to maximize the plan’s investment returns for the benefit of its active and retired members. However, there is a growing global consensus that trustees must at least have a considered and informed discussion on the issue. The U.K. Pensions Act 2004 requires trustees of occupational pension plans to disclose in their Statement of Investment Principles whether they adhere to an SRI approach to investment; likewise in France, Germany, Belgium and Sweden. Canada’s federal pension regulator, the Office of the Superintendent of Financial Institutions (OSFI), now requires plans to disclose how they vote their proxies at shareholders’ meetings on SRI issues, which, in turn, requires them to reveal whether the plan itself has an SRI policy.
Recommendation 8-23 — Plan statements of investment policy should reveal whether, and if so, how, socially responsible investment practices are reflected in the plan’s approach to investment decisions.
8.4 Participation in Governance by Active and Retired Plan Members
In several sections of this chapter I have suggested why participation in plan governance by all classes of plan members is important in itself and how it may affect the intensity of regulatory oversight to which plans are subject. In this section, my focus is on the ways in which participation can be encouraged, and the forms that it might take.
8.4.2 Mandatory advisory committees
The PBA already contemplates that “members and former members” of a pension plan may establish an advisory committee by the simple expedient of holding a vote and securing a majority of those voting. These committees must provide for representation of each class of plan members — active, retired and, presumably, deferred. However, their functions are somewhat vaguely defined — to “monitor” the plan, to “make recommendations to the administrator” and to “promote awareness and understanding” of the plan. Moreover, some sponsors are reluctant to assist advisory committees in contacting members and retirees due to concerns about legal privacy restrictions; requests for detailed — even basic — information about plans sometimes do not elicit an adequate response; and, as a result, it seems, advisory committees are neither effective nor numerous.
For reasons already discussed, I believe that substantive gains would accrue to the system and to individual plans from greater member participation. This proposition is already being tested, with generally favourable outcomes, in JSPPs and, perhaps to a somewhat lesser extent, in MEPPs. However, in most SEPPs, it is not. I am therefore confronted with the familiar (and fair) question: “if we build it, will they come?” If SEPP advisory committees are equipped with appropriate mandates and powers, will members and retirees want to participate? Will they find ways to use such committees constructively to improve plan administration, while respecting that formal decision-making authority continues to reside with the sponsor (subject, in some cases, to constraints imposed through collective bargaining)? Or will members decline to participate and leave the advisory committee a hollow shell, a reminder of my misplaced confidence in the desire and capacity of workers to participate in the governance of their own affairs?
The only way to answer this question is to experiment with the form and function of advisory committees. In large, diffuse enterprises, for example, they may be viable only in virtual form — as electronic networks that hold “town hall meetings” on-line. In small workplaces, they may find a home under the union’s organizational umbrella. In declining one-industry communities, they may become very active by drawing on the daily personal contacts of plan members and their shared concerns about the future. I am not troubled by the fact that these committees may look very different from each other, at least initially.
However, they will all have certain tasks in common: securing and analysing information concerning the plan, and distributing the results to the active and retired members; and conveying the views of members to the sponsor or administrator. Advisory committees might also assist when (if my recommendations are followed) member votes are held on proposals such as the resetting of plan obligations on insolvency. However, since their functions are purely advisory and have no legal effect, members of advisory committees should not be held to the same legal standards as members of the formal institutions of plan governance; nor should the functions of these committees be specified in great detail by legislation.
Nonetheless, however structured, advisory committees should be properly equipped to do their work.
Recommendation 8-24 — Except as provided in Recommendation 8-26, every pension plan should be required to establish a pension advisory committee (PAC). A PAC should comprise at least five members, including one representative selected by retired members and one by each class or group of active members.
When plan members are represented by one or more trade unions or equivalent organizations, such unions or organizations should nominate their PAC representatives.
Recommendation 8-25 — The PAC should:
- be provided with effective means of communicating with all plan members, including retired members;
- have access to all information distributed to plan members or filed with the regulator;
- receive notice of all amendments, applications, proceedings or transactions involving the plan; and
- be informed of all votes or consultations designed to solicit the views of plan members.
The PAC should present annually to plan members a report on the state of the plan and an account of its own activities during the year. This report should be distributed with other information that the administrator is required to provide to plan members.
Recommendation 8-26 — No PAC need be formed when (a) a plan provides for the participation of active and retired member representatives on its governing body, (b) a collective agreement provides for a joint sponsor–member–retiree advisory committee, or (c) a majority of active and retired members vote in a secret ballot not to establish a PAC.
I hope that positive experience with PACs will encourage employers, workers, sponsors and members to start down the road to a more fully realized model of joint governance. That is the subject of the next set of recommendations.
8.4.3 Shared governance
A majority of plan members are already enrolled in MEPPs and JSPPs, both of which provide for member participation in plan governance. (Retirees from these plans will gain comparable rights of participation if the recommendations below are accepted.) However, the sizeable minority of plan members enrolled in SEPPs seldom, if ever, have access to such participation. I believe they should, and that participation may be in the sponsor’s interest as well as their own.
In one sense, of course, that possibility is readily available: SEPPs can convert themselves into JSPPs if workers and/or their union agree to contribute to their pension plan along with the employer, and if sponsors agree to give up unilateral control of the plan in favour of a shared governance model. However, this approach has not found favour outside the public sector — the only sector where JSPPs have so far taken root. I therefore make my next recommendation in the hope that it will persuade some SEPP sponsors and members to consider the attractions of joint governance more carefully.
Recommendation 8-27 — The sponsor of a single-employer pension plan may enter into an agreement with a trade union, or other union-like organization that represents plan members, to establish a jointly governed target benefit pension plan. Such plans should (a) be governed by a board of trustees or comparable body on which representatives of plan members and retirees should comprise not less than one-half of its members, (b) offer target benefits, and (c) be funded on the same going concern basis as multi-employer and jointly sponsored plans.
The jointly governed target benefit pension plan (JGTBPP) offers members and retirees a voice in plan governance — a voice that becomes more audible because it will also be heard in negotiations over wages and working conditions. And it offers sponsors a way of retaining the labour market benefits associated with single-employer plans but at the same time relief from solvency funding, and a technique — target benefits — for ensuring that plan liabilities will not in the end outstrip plan assets.
The JGTBPP is not a perfect solution to the problem of dwindling SEPP membership. It can be seen by sponsors as a derogation from unilateral control, and by unions and their members as a retreat from conventional DB benefits. However, in a context where single-employer plans are becoming increasingly rare, the JGTBPP is, quite frankly, a strategy designed to tempt employers back into offering pensions and to ensure that plan members and retirees are not left with high aspirations but no pension coverage.
My belief that good governance has the potential to resolve pension issues lies at the heart of my proposal to establish JGTBPPs . I therefore deem it essential that governance of these plans be conducted in an exemplary fashion, in accordance with the high governance standards I discuss earlier in this chapter. Indeed, the JGTBPP can serve as the proving ground for many of those standards.
8.4.4 Retired member participation in plan governance
Seniors and retirees made clear at the Commission’s hearings that they resented being described in the PBA and in plan documents as “former members;” that they were sometimes refused effective access to plan information by sponsors, the regulator and even in some cases by their own union; and that they were usually denied the right to participate in governance decisions, including those that might adversely affect their pensions. An example of the latter situation, discussed above, would be the decision of an under-funded union-administered MEPP to reduce pensions already in pay. Finally, those who were formerly union members suffer double disfranchisement, since retirement deprives them not only of a voice in the affairs of the pension plan, but also — in most unions — of a role in union decision-making.
It is inappropriate, I feel, that retirees should be denied a voice in decisions that crucially affect their interests. It is counterproductive to deprive plans of the benefit of their knowledge and experience. And it is unnecessary, because procedures can be devised to accommodate their interests and give them a place in plan governance, at least where active plan members enjoy the right to participate. Given that they may need the same technical advice and backup support that unions usually provide to active members serving on governing boards, retired members should be able to seek assistance from, and nominate as their representatives on any governance body, officials of organizations of retired persons, professional advisors or other persons of their choosing.
Recommendation 8-28 — The Pension Benefits Act should be amended to describe pensioners as “retired” rather than “former” plan members.
Recommendation 8-29 — Retired and deferred plan members should be assured effective access to all plan information available to active plan members.
Recommendation 8-30 — Retired plan members should be eligible to participate in any plan governance process in which active plan members are eligible to participate. The extent of their representation and participation in governance should be determined by the governing body of each plan, but must be sufficient to ensure that their voice is heard and their interests protected.