The governance of pension funds needs radical change. To this end Minister Kamp has submitted an act to parliament. The act implies a number of substantial changes. The aim: better risk management.
Pension funds can choose from two board models, the mixed or the independent board model. The directors and fellow policymakers should instead of being reliable and expert, be reliable and suitable in these models. The internal supervision will also be sharpened.
Mixed board model
In this model the board consists of representatives from employees (associations), employers (associations) and pensioners. By adding pensioners all risk bearers take part in the board model. It is also possible to have a maximum of 2 independent external experts participate in governance. The representation of each of these groups in the management should be as balanced as possible. A fund with a mixed board model is obliged to appoint a board of participants and pensioners.
The independent board model
In this model the board consists entirely of professional managers. A fund with an independent professional management is obliged to appoint a board of stakeholders. Employees, employers and pensioners all participate in this body in a composition that is as balanced as possible. The body has to give approval in certain matters, including the strategic investment policy and decisions concerning pension contributions, on other matters it only advises the board.
Reliable and suitable
The act is in keeping with the legislation that comes into force on the 1st July 2012 for banks and insurers, among others. Managers of pension funds will have to be reliable and fit for their function. The act has two important adjustments compared to the current situation. First, the term ‘expert’ will be replaced by ‘suitable’. Secondly, also the members of the supervisory board and the visitation committee have to be reliable and suitable for their function. The term suitable is more general than expert: apart from knowledge and experience the members also have to be able to demonstrate professional behaviour and critical capacity. Furthermore, it is of importance that they have enough time for the function.
The model for internal supervision is dependent on the kind of fund. In addition, tasks and competencies for internal supervision will be strengthened. Industry pension funds will be obliged to appoint a permanent supervisory board. Only when they are fully insured may the supervision be executed by an inspection committee. Corporate pension funds may opt for a supervisory board or an inspection committee. The frequency of inspections needs to be increased from once every three years to an annual inspection.
The duties and powers will increase in particular for the permanent supervisory board. For instance this board will have the right of approval of, among other things, the establishing the annual report and the annual account, the profile of managers and decisions concerning liquidation, merger, among other things.
What to do?
The adaptation of the law may have significant implications for the governance model of a pension fund. At the commencement of the law there is a transition period of 1 year for the existing situation in a fund. To gain insight into the consequences the new law has for you as a pension fund it is advisable to carry out an impact analysis. Such an analysis helps you see which steps you have to take before you will be compliant with the changed law and enables you to decide how much time you have for this process. Some relevant questions are:
- Which governance model fits the fund?
- Are there function profiles available and are they appropriate?
- Do the current managers meet this function profile, are they suitable for their function?
- Have the required councils/committees been appointed?
- Have the charters/mandates for these councils/committees been realised sufficiently?
- Should the statutes of the pension funds be adjusted?
- Has the internal supervision been realised according to the new requirements?
Many questions to answer, but they will help you avoid any unpleasant surprises.
For more information concerning the amendments of the law and for an impact analysis, please contact Charco & Dique at 020-4165403 or send an e-mail to firstname.lastname@example.org