Allan Lewis, Contributor
AS THE ownership of organisations and institutions becomes more diverse, and the environment in which they operate more complex, governance - the act or manner of governing - assumes an increasingly important role in the global political economy. Not surprisingly, improving governance is an important issue in the private and public sectors in Jamaica.
Governance has also become a central issue for many influential international institutions. To wit, the Organisation for Economic Co-operation and Development ("OECD") asserts that "good, effective public governance helps to strengthen democracy and human rights, promote economic prosperity and social cohesion, reduce poverty, enhance environmental protection, and deepen confidence in government and public administration." Pension funds in Jamaica, with estimated assets in excess of $100 billion, should therefore be required to adopt 'best practices' and thus be well governed.
The importance of good governance arrangements for pension plans is easily explained as a result of the agency relationships that exist within these financial security arrangements. Members and beneficiaries of pension plans expect trustees, plan sponsors and other persons or institutions involved in the administration and financing of pension plans, to conduct the affairs of these financial security arrangements entirely in their best interests. This is often difficult despite the best efforts of those involved, because the interests of stakeholders - plan members, former members, plan beneficiaries, and employers - often conflict.
STAKEHOLDERS PENSION PLANS
Good governance arrangements require that the board of trustees consider the interests of the different stakeholders surrounding a pension plan, and if necessary, their relative importance. In all potential conflicts of interest, the board of trustees should 'seek to observe the greatest possible openness with respect to the interested parties and give evidence of a fair and sustainable weighing of interest."
The Pension (Superannuation Funds and Retirement Schemes) Act, 2004 ('the Act') should ensure that occupational pension schemes in Jamaica adopt consistent standards of practice. The Act will provide a legal obligation for trustees to be accountable for three distinct areas: the administration of plan benefits; the management of plan assets including incoming and outgoing cash flows; and the transmission of information to members, regulators and other stakeholders.
Incidentally, a pension plan governance framework already exists in the form of trust law as amended by statute. It is noteworthy that trust law has been in continuous development for hundreds of years. Briefly, trust law principles require that pension plan assets be managed by trustees who own and manage the assets for the benefit of members and other stakeholders. In addition, trustees have an obligation to act honestly and prudently in the best interests of the beneficiaries. The scheme's assets must be segregated from those of the employer (or other plan sponsor) so that they are protected from the employer's creditors.
WEAKNESSES
Notwithstanding the strengths of trust law, there are a number of weaknesses which impact on its usefulness as a tool to ensure the best governance of pension funds. According to a review of pensions law in the United Kingdom, trust law is complex and uncertain, and is characterised by fixed and high regulatory costs. More importantly, it is difficult for members to enforce their rights, especially for disputes that are not about members' right to benefit. Moreover, trust law is generally characterised by an absence of a proper balance of power between members and trustees, and an absence of practical mechanisms to ensure that trustees act at arm's length.
What then constitutes good governance arrangements for pension funds? Pension funds, which exist solely to provide retirement and other benefits for members and other beneficiaries, should be managed honourably
