Occupational pension funds

Date01 June 2017
AuthorAlexia Autenne
Publication Date01 June 2017
EJS712152 158..171 EJSS
European Journal of Social Security
2017, Vol. 19(2) 158–171
Occupational pension
ª The Author(s) 2017
Reprints and permissions:
funds: Governance issues
DOI: 10.1177/1388262717712152
at the international and
European levels
Alexia Autenne
University of Louvain and National Fund for Scientific Research, Louvain-la-Neuve, Belgium
This article reviews the orientation of the European regulation on pension fund governance in the
international context of the OECD’s recommendations. It outlines the features judged to be
essential for a sound private pension scheme’s governance. It then describes the orientation of the
European regulations in this area and sets out some criticisms. The focus is on private sector
‘defined-contribution’ occupational pension plans managed by a pension fund, in light of the shared
perception that the ‘governance’ issue is particularly sensitive for these types of schemes.
Governance, occupational pension plans, pension funds, european union, OECD, socially
responsible investments
The topic of pension fund governance has not received the same research attention as corporate
governance. In this field, there are a limited number of publications both from a theoretical point of
view and with an empirical dimension.1 However, the subject matter is relevant in the context of
reflections on the evolving ‘public-private’ mix in national pension policies. Indeed, for most
Member States, ensuring the financial and social sustainability of the pensions is a crucial
1. In particular, the series of survey-based research projects on pension fund governance conducted by Ambachtsheer
whose most recent contribution is Ambachtsheer and McLaughlin, J. (January 2015).
Corresponding author:
Alexia Autenne, Colle`ge Thomas More, University of Louvain (Uclouvain), and National Fund for Scientific Research,
CRIDES, Place Montesquieu 2/L2.07.01 1348, Louvain-la-Neuve, Belgium.
E-mail: alexia.autenne@uclouvain.be

challenge for the next few decades. The so-called ‘ageing process’, caused simultaneously by an
increase in longevity, a decrease in fertility and the effects of the baby boom have important
impacts on the long-term viability of retirement schemes. Factors other than demographic ones
also play a role, for example the high level of unemployment, persistently low interest rates and
small increases in GDP. In this context, various countries have encouraged the development of
occupational pension plans, with a particular emphasis on plans for transferring risks on affiliates
and giving them more responsibility for old age retirement. This is the well-known move from
‘defined benefit’ (DB) to ‘defined-contribution’ (DC) plans. However, as Gordon Clark and Roger
Urwin pointed out in 2011, whereas DC plans were once regarded as a simple solution to burden-
some DB liabilities, there is, in reality, nothing simple about a well-designed DC pension plan.
Complexities associated with DB liabilities are exchanged for complexities in the design and
management of DC institutions.2 It follows that ‘governance’ is an essential feature of any sound
DC occupational pension system. In a collective study on public-private pensions in Germany and
the UK, Lutz Leisering demonstrated that the need for public regulation and control of private
pension has increased as a result of privatisation and the State’s retreat from having sole respon-
sibility for providing adequate legal pensions.3
On the international scene, the OECD has pinpointed the importance of the principles of healthy
steering of occupational pension schemes, considering the multiple interests (employers, affiliates,
funds) that are involved.4 According to the OECD, in a changing socio-economic environment,
with a shift away from pay-as-you go financed public system towards a multi-pillar approach,
national differences in the regulation and organisation of occupational pensions might affect the
pecuniary situation of retirees, their risk exposure and their participatory rights.
The European Union has also become aware of the importance of pension fund regulation and
governance. Consequently, a European policy has been developed for Occupational Retirement
Provision (hereafter IORP) frequently referred to as ‘pensions funds’5 with the aim of fostering the
single internal market for insurance and private pensions, an area of regulation where national
prerogatives are not firmly established.
International normalisation of pension fund governance
The importance of the ‘governance factor’ for the financial and social sustainability of occupa-
tional pensions is now recognised by different transnational organisations and backed by the
scientific literature6. The OECD, CAPSA7, Stanford Institutional Investor Forum, CFA Institute,8
among others, have highlighted the structural, procedural and relational dimensions of pension
plan governance; they have drawn attention to the necessity of drafting internal and external
mechanisms for improving investment performance without sacrificing beneficiaries’ security.
2. See Clark, and Urwin (2011).
3. See Leisering (2011) and Ebbinghaus (2011).
4. See OECD (2012) and OECD (2006).
5. The term ‘pension fund’ is used by convenience, although the exact European legal concept, at the heart of the 2003/41
Directive, is IORP.
6. See Clark and Urwin (2011) and Clark and Urwin (2008). See also Ambachtsheer and McLaughlin (2015).
7. Canadian Association of Pension Supervisory Authorities, see the various publications related to Pension plans.
8. See CFA Institute (2008), Code of Conduct for Members of a Pension Scheme Governing Body.

European Journal of Social Security 19(2)
According to the OECD, an occupational DC pension plan deals with a complex nexus of
agency relationships involving different entities and persons engaged in the functioning of the
scheme. This configuration raises risk transfer problems, for instance between sponsor and ben-
eficiaries, and surveillance and control problems that vary in severity according to the structure of
the plan (defined benefit or defined contribution).9 Thus, adequate pension fund governance
implies providing a structure through which the objectives of the plan are set as well as the means
for attaining those goals and monitoring performance.
Governance and good governance
Fiona Steward and Juan Yermo (2008) argue that the basic ‘governance’ feature is one of mitigat-
ing agency costs stemming from the agency relationships between plan members and beneficiaries,
on the one hand, and the persons or entities involved in the administration or financing of the
pension plan, on the other hand. Pension fund governance is supposedly the mirror image of
corporate governance (the governance of public limited companies) comprising the nexus of
relationships between the company’s management, board, shareholders and other stakeholders.10
Nevertheless, considering the differences between a pension fund and a traditional corporation,
which is discussed below this argument must be handled cautiously.
‘Good governance’ goes a step further and aims to deliver high pension fund performance while
keeping costs for all stakeholders low11 Indeed, according to Clark and Urwin, good governance by
institutional asset owners makes a significant incremental difference to value-creation as measured
by their long-term risk-adjusted rate of return.12 The threefold principles of good governance are
summarised13 in terms of: (i) organisational coherence including an institution’s clarity of mission
and its capacities; (ii) people referring to who is involved in the investment process, their skills and
responsibilities; and (iii) process, i.e. how investment decision-making is managed and
Governance and good governance are influenced by two sets of norms: the legal structure of the
pension fund, framed by statute, property rights and covenants, and the non-legally binding rules
and procedures that sustain the functioning of the fund consistently with desired goals.
The OECD Guidelines14 insist upon the following:
The ‘governance structure’ should ensure an appropriate division of operational and over-
sight responsibilities as well as the accountability and suitability of those with such
The ‘governance mechanisms’ require pension funds to have appropriate control, commu-
nication and incentives to encourage good decision making, proper and timely execution,
transparency and regular review and assessment.
9. See Mignault (2016).
10. See OECD (2012).
11. See Steward and Yermo (2008).
12. See Clark and Urwin (2008).
13. Ibid.
14. See OECD (2012) and OECD (2006).

From the legal point of view, these requirements can be grouped around four categories of
norms, which are essentially present in any sound pension fund regime15:
The fiduciary duties of the fund managers: in situations characterised by agency conflicts,
the law requires that the agent acts prudently, diligently, loyally, honestly and for the sole
benefit of the principal (the employer and the affiliates).
The composition of the fund’s governing body: as an essential organ, the governing body of
the fund must establish an appropriate and subtle equilibrium between expertise, represen-
tativeness and independence from the sponsor and must be composed of competent people
designated by the sponsor and the affiliates as well as of independent experts.
The general...

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