Good Governance: Short-term predictability. Long-term stability.

In the pension and benefits world, governance connects the complexities of effective and responsible administration, fiduciary obligations, and the timely and cost-effective delivery of benefits to plan members and their beneficiaries. In the first of our multi-part series on governance, we’ll share a high-level overview of the ways in which governance best practices can foster short-term predictability and long-term stability.

Why governance matters

A sound governance framework and clearly articulated processes for documenting, overseeing, managing and administering pension and benefits plans are critical to ensuring fiduciary obligations are met. Good governance should enhance accountability and transparency, mitigate risk, ensure compliance with rules and regulations, and foster better decision-making. It can also increase stakeholder trust and confidence, encourage innovation and growth and support long-term development – all with the ultimate goal of contributing to positive plan performance.

Enhancing accountability and transparency

One of the primary functions of good governance is to establish clear lines of accountability and enhance transparency. Defining clear roles and reporting structures establishes a better understanding of responsibilities and accountability. Transparency is fostered through regular reporting, open communication channels, and the disclosure of key information.

Mitigating risks

Effective governance also plays a crucial role in risk management. By establishing robust internal controls and risk management frameworks, plan sponsors and their administrators can identify, assess, and mitigate potential risks before they escalate into significant issues. This includes financial, operational, compliance, and reputational risks. We will take a deeper dive into risk management practices in a future article.

Ensuring compliance

Compliance with laws, regulations, guidelines and industry standards is a fundamental aspect of operational governance and processes. A robust governance framework ensures compliance with all relevant legal and regulatory requirements. In addition to establishing reporting mechanisms for ensuring compliance, it should include periodic assessments of the governance framework itself, including all supporting documents and, in Canada, for pension plan sponsors, reference the Canadian Association of Pension Supervisory Authorities (CAPSA) Guidelines and questionnaires as indicators of best practice.

Fostering strategic decision-making

Effective governance structures facilitate informed and strategic decision-making. Board members, trustees and management offer valuable insights and perspectives through a wealth of diverse experiences and expertise. Effective governance systems ensure that decisions and actions are well-considered and aligned with the plan’s long-term goals. They also ensure that plans are positioned to navigate complex challenges and seize opportunities for innovation and growth.

Building stakeholder trust and confidence

Stakeholders, including sponsors, members, customers, suppliers, and the broader community, are more likely to trust and have confidence in an organization and a board that demonstrates good governance. When governance practices are transparent, accountable, and fair, stakeholders feel assured that their interests are being considered and safeguarded.

Encouraging innovation and growth

While governance is often associated with control and oversight, it also plays a crucial role in fostering innovation and growth. A governance system that encourages education, creativity, experimentation, and calculated risk-taking can better position plans to adapt to changing market conditions and embrace advancements.

Supporting sustainable development

In today’s global landscape, plans are increasingly expected to operate in a socially and environmentally responsible manner. Plan governance ensures that plan administrators take into account the impact of the plan’s activities on society and the environment. This includes adopting sustainable practices, considering corporate social responsibility (CSR) initiatives, and ensuring ethical supply chain management. For pension plan sponsors it also includes responsible investment of pension funds.

Expert and tailored solutions

For pension and benefits plan sponsors and trustees, there is no one-size-fits-all approach to governance and practices vary widely. This highly nuanced area requires experience and expertise to develop solutions that are appropriately tailored to each plan’s structure and resources. There are, however, a few critical success factors that should be considered across every governance journey:

Clear communication: This ensures that all stakeholders are informed and engaged throughout the review process, while fostering a collaborative approach where insights and feedback are actively sought out and incorporated to refine strategies.

Transparency: By openly sharing information and decisions, transparency helps prevent misunderstandings and promotes accountability, ensuring that all parties are aware of how the plan is managed and understand the impact of any changes. It also facilitates a clear line-of-sight into decision-making and enhances the credibility of the governance process, contributing to the long-term sustainability of the plan.

Expertise and adaptability: The ability to navigate complexities and provide tailored solutions is paramount to the success of every governance model. Leveraging the expertise of professionals with a broad range of experience is critical as they bring valuable insights and proven strategies that can be adapted to the unique needs of each plan.

Governance is no longer simply a nice to have “best practice.” It’s a necessity. Changing legislation, cyber, geo-political and capital market risks as well as growing member and beneficiary demand for accountability, has propelled governance to the top of the priority list for plan administrators and boards alike.