Retirement plan governance doesn’t elicit the same glamour as other facets of managing investments, but its importance is difficult to ignore—particularly in light of recent debacles where poor oversight, negligence and, in some cases, outright fraud have resulted in costly outcomes. These events don’t have to happen: a thoughtful approach to governance will create better results.
Governance is the process of making and implementing decisions. Ultimately, it is about accountability and allocating resources to meet objectives. Good governance doesn’t guarantee a successful outcome, but it significantly reduces the likelihood of an unpleasant surprise.
The governance structure of Canada’s leading mega-plans is very different from that of smaller plans. Due to their size, larger plans tend to have the depth and policies to ensure a smooth decision-making process. Smaller plans, on the other hand, tend to lack the resources required to stay the course and are therefore more susceptible to lapses in governance.
Smaller plans also rely more on the advice of third-party advisors. The challenge here is, there are opportunities for conflicts of interest to surface. Most service providers attempt to address these conflicts and put their clients at ease. However, the boundaries between consultants and asset managers have blurred, and there is pressure to grow revenue, which may lead to “short-termism.” Maintaining a long-term view is essential to creating value.
Good governance should address the true cost of providing benefits. If you feel what’s being offered is too good to be true, then it probably is. In the investment business, the price that appears on the invoice does not always reflect the true cost of the service. There is plenty of room for slippage, and unreported costs get buried in performance.
A survey of 717 endowments and foundations, Commonfund (a U.S.-based asset manager) revealed that respondents paid a median of 50 basis points in total management fees. However, Commonfund estimates the actual cost is substantially higher, in the range of 100 to 175 basis points, once all costs are accounted for. The greater the allocation to alternative asset classes, the more likely there will be unreported costs.
The global initiative to invest responsibly has broadened the definition of governance to include new areas. Recently, the Financial Services Commission of Ontario (FSCO) provided guidance requiring Ontario registered pension plans to include information on whether environmental, social and governance factors are incorporated into a plan’s Statement of Investment Policies and Procedures (SIP&P) and, if so, to describe how these factors are incorporated. Starting in 2016, all registered pension plans must file their SIP&Ps with FSCO within 60 days after Jan. 1, 2016. This means investment policies are about to undergo heightened scrutiny.
With the expectation of lower returns and heightened risk, organizations need to remain vigilant. The ongoing monetary stimulus and search for yield has created unprecedented risks in financial markets. Have you reviewed your governance structure recently? If not, now is the time to start.
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