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UK and Canadian Pension Fund – Recommendations
Comparative Study of U.K.
and Canadian Pension Fund Transparency Practices
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8. Recommendations and
Future Research
The U.K. experience with pension fund transparency reform
tells us several things.
First,
that just as in Canada, the U.K. legal and regulatory
framework for pension funds was (and is) complex, embracing
trust law, contract law, tax law, social security law,
employment law and the Financial Services Act.
Second,
that despite the complexity, effective political leadership
combined with active consultation with stakeholders
was sufficient to establish broad political and societal
consensus for increasing the transparency of pension
fund administration in the U.K. with respect to including
policies on social, environmental and ethical issues
in formal statements of investment policy. A key step
in the consultation was the government’s signalling
that the reforms were consistent with established practice
in fiduciary duty, thereby removing the “regulatory
chill” that applied formerly to pension trustee
duties.
Third,
that there is no evidence that the U.K. reforms have
resulted in negative impacts on costs or efficiency;
indeed, these apparently threat-free U.K. reforms are
now being adopted elsewhere in the world, consistent
with a general desire for more transparency and accountability
in corporate governance and performance being promoted
by the OECD and other bodies.
Fourth,
that pension fund reform requires active engagement
by the fund managers, pension professionals, pension
forums and civil society actors. In the U.K., this engagement
occurred in the aftermath of significant problems that
emerged during the 1990s as a direct result of mismanagement
of pension assets by corrupt individuals and sharp practice
by large financial institutions. Happily, Canada has
not, to date, suffered the scale of controversy associated
with pension fund assets experienced in the U.K., where
mis-selling of pension policies and misappropriation
of funds led to very active demands for reform and especially
for improved accountability and transparency.
However,
recent commentary has raised public awareness of the
need for more rigorous oversight of pension assets.
This commentary has drawn attention to the Ontario Municipal
Employees Retirement System’s expensive changes
of policy on outsourcing and problems at Air Canada
and Stelco with respect to bankruptcy and underfunding
(Campbell, 2004; Canadian Press, 2004). Meanwhile, federal
government plans to limit pension investments in income
trusts have also generated some controversy (Church
and Scoffield, 2004). We believe therefore that Canada
is ready for governmental leadership and a broader national
debate on pensions and their governance.
From this we recommend that the federal and provincial
governments now consider:
i)
The need for Canada to adopt legislation similar to
the U.K. requirement for pension funds to disclose
the extent (if at all) to which social, environmental
and/or ethical (SEE) considerations are taken into
account in the selection, retention and realization
of investments; and the policy (if any) directing
the exercise of the rights (including voting rights)
attaching to investments in both the Statement
of Investment Policies and Procedures (SIPP) and the
annual reports to members. This should be accompanied
by active clarification of the fact that exploration
of SEE issues in investment decision making for the
purposes of risk minimization and/or long-term value
maximization is not in conflict with the established
fiduciary duties of pension fund managers and trustees.
45
ii)
The need for a broader public policy and civil society
debate on the effective management and supervision
of Canadian pension funds (to include such issues
as general transparency [including SEE criteria],
representation of pensioners and deferred pensioners
on boards of trustees, protection of pensioners and
deferred pensioners from underfunding, impacts of
bankruptcy, members’ awareness and understanding
of pension plans, etc.).
There
are various mechanisms by which such recommendations
might be actioned. These include convening an all-party
parliamentary committee of inquiry or direct intervention
by the federal and provincial governments.
We
also believe that Canadian pension fund associations
and regulators 46have
a very important leadership role to play in helping
to clarify and promote international best practice in
Canada. So we recommend that these groups consider:
iii)
The need for Canadian financial institutions to become
more broadly familiar with both mandatory and voluntary
pension fund transparency practices—particularly
in relation to SEE criteria—in Europe and elsewhere
in order to ensure that best-practice standards are
observed in Canada.
iv)
The need to promulgate model pension fund laws consistent
with international best practice on transparency that
may require the inclusion of policy statements on
SEE criteria in Canadian statements of investment
policies and procedures for pension funds, recognizing
that there is no evidence of negative impacts arising
from such transparency.
In
this regard, we note that the Canadian Association of
Pension Supervisory Authorities is currently consulting
on priorities for new model pension fund laws in Canada.
We
also note that Australia has amended transparency regulations
dealing with all financial bodies so that a SIP-type
provision now applies to all pension funds and mutual
funds and charities/foundations. 47In
Canada, it might make sense to include pension funds,
mutual funds and charities in new disclosure requirement
legislation. This would require a higher level of coordination
altogether, since in Canada financial regulation remains
highly complex and fragmented.
Finally,
we are aware that, in concert with the need for governmental
and pension fund institutional leadership, there is
also a need for more research to inform leadership action.
Certainly, there is a need for further examination of
the options for streamlining and simplifying financial
regulation. 48In
addition, it is still entirely unclear whether the U.K.
Pensions Act changes have led to significantly higher
take-up of social, environmental and ethical issues
by pension funds in addition to their adoption of policy.
We received somewhat conflicting views on this point
from our interviewees. Equally, it is not clear that
the introduction of transparency on SIP/SEE in the U.K.
has stimulated interventions such as the adoption of
widespread screening in addition to the somewhat less
onerous if wider-scale adoption of corporate engagement
practices by fund managers. And, of course, we still
do not know whether inclusion of a risk-based, long-term
value-oriented approach to SEE is guaranteed to improve
pension performance and security (although there is
increasing evidence that it may).
We
do not believe that research is a necessary precondition
to action by governments, pension fund professionals
and others. Nevertheless, we observe that it would be
instrumentally helpful if the research community could
address:
v)
The need for further research to determine the case
(or absence of a case) for legislative reform (e.g.,
the streamlining of federal and provincial pension
fund laws and regulations within the context of SEE
criteria and more effective financial regulation generally).
vi)
The need for further research to determine the case
(or absence of a case) for consideration of SEE criteria
as a way to protect the interests of pensioners and
deferred pensioners with respect to portfolio risk
minimization and/or long-term value maximization.
© 2013