Good Governance matters – never take it for granted

One of the key advantages of moving a company pension scheme into a master trust arrangement is the near automatic upgrade in governance. This article was first published in Accountancy Ireland.

Few if any small schemes can afford the overhead associated with maintaining a full board to oversee its activities and performance. Some Master Trust providers have outsourced the trusteeship to a professional service provider which, while ensuring full compliance with all regulations, may not necessarily have the required deep insight into key issues such as investment performance, operations, and member engagement proposition of the sponsoring provider.

According to Zurich’s Head of Corporate Distribution and Customer Relationship Management, Rose Leonard, a well-run master trust should have a board that replicates or is at least a microcosm of what you would find in the corporate world.

“The best run companies have boards made up of executives from the actual company who bring deep insights into the business and its activities, along with a number of strong independent directors who can support the executives or challenge them on their performance as appropriate,” she says. “That is best practice. It is the right corporate governance model and has been proven to work in corporations around the world. This is the model that needs to be replicated for a well-run master trust.”

In large corporations, those executive board members will typically be the chief executive and chief financial officer but can include others. “Other key executives who can bring that deep knowledge of the organisation such as the chief operations officer may also be members,” Leonard explains.

“Other executives will also report to the board on a regular basis and be subject to questions from the independent directors. As with the board of any company, the master trust board may call in experts from the sponsoring provider to go before the board to provide updates on the key functions of the Registered Administrator or to consider environmental, social and governance issues.  Regular updates on investment performance and risk management are critically important, for example. If timelines are not being met or other issues have arisen the independent directors can seek explanations.”

It is not simply a question of gathering half a dozen people in a room and trusting them to make the right decisions. “It’s one thing having the right model,” she adds. “But you also need to have the right framework, the right processes, and the right risk management practices to identify issues and help the independent directors on the board to ask the right questions. Every master trust board should have these things in place and adopt what is generally accepted as a good corporate governance model.”

“I would advise against any Master Trust provider using entirely independent directors” says Leonard. “Independent directors on their own quite simply would not have the deep insights into the various aspects of the scheme’s performance and operation that is required. The question I would always ask in these circumstances is – ‘Could a major corporation operate properly without senior company executives on its board. The answer is clearly not. A well- functioning board needs that blend of executive and independent directors.”

Having the right policies in place is also of key importance, she adds. “The board must have policies in place to manage things like conflicts of interest, for example, a director must stand back from issues that are personal to them. You can’t appoint relatives to key roles or hand out contracts to them, for example. Having the right policies in place prevents situations like that from arising.”

It boils down to taking internationally recognised corporate governance practices as they apply to boards in the corporate sector and applying them to a master trust.

“You need to take the same frameworks and policies and apply them to the master trust board,” she explains. “This means things like having a board secretary, having papers prepared and distributed in advance, and having policies in place that are live and real.”

The interaction between executives and independent directors is also important. “For example, an executive who is not a member of the board may report a drop off in performance in their area. The board can discuss this with them, and it may turn out that the underlying reason is a lack of resources. In these circumstances the board of the Master Trust may be able to intervene or make representations to the provider to secure the additional resources required.”

Those type of discussions can be very valuable. Another example could be where membership of a participating employer is falling. “The Master Trust board can seek an explanation for this,” Leonard notes. “It could be perfectly straightforward such as a case where employee numbers are also falling. But there could also be issues in relation to employee engagement or understanding and these can be highlighted for action.”

The relationships that exists between the Master Trust board members and the executives within the provider is critically important. “We all get defensive if we are put on the spot,” says Leonard. “That’s a natural human reaction and it is more pronounced in formal situations. However, it can be much easier and more constructive to give feedback in an informal situation. That’s why there must be formal and informal interactions between board members, and between the board and the Master Trust provider. While boards must hold people to account for their performance, they also need to support them where improvement is required and that can sometimes be done best through less formal conversations.”

Finally, Leonard advises employers not to simply assume that a master trust will have a board that conforms to best practice in terms of corporate governance. “Check it out first, make sure it has the right mix of executives who bring expert insights together with strong independent directors who can challenge and support as necessary. And make sure the board has the right frameworks, processes, and policies in place for it to do its work properly.”

To learn more about the Zurich Master Trust, just visit ZurichCorporate.ie or email Rose.leonard@zurich.com


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