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Institutional Investment - July 22, 2008

Trusteeship on a pension plan board carries a great burden of responsibility - interview with Bob Johnson

In this month's interview, Bob Johnson, Deputy CEO and Managing Director in the Education Division at CFA Institute and member of the EDHEC Risk and Asset Management Research Centre's International Advisory Board, introduces and explains the background to the new Code of Conduct for Members of a Pension Scheme Governing Body, produced by the CFA Institute Centre for Financial Market Integrity and a working group of global pension experts.

Bob Johnson, PhD, CFA

Why is a code of conduct for pension plan trustees necessary?

Bob Johnson:

Funding pension plans and securing the financial future of pension participants and beneficiaries is a growing global challenge. An aging population and increasing life expectancy will continue to limit the ability of the State to act as an effective provider of retirement income for individuals worldwide. Accordingly, the role of pension plan trustees in managing private and institutional pension fund assets assumes ever increasing importance. With more than US$25 trillion in global institutional pension fund assets1 and an investment landscape becoming ever more complex, trusteeship on a pension plan board carries a great burden of responsibility.

The conduct of those who govern pension plans significantly impacts the lives of millions of people around the world who are dependent on pensions for their retirement income. Just as shareholders trust corporate directors to look out for their best interests in a corporate setting, trustees are charged with looking out for the interests of the participants in and beneficiaries of pension plans.

It is critically important that pension schemes be overseen by strong, well-functioning governing bodies operating in accordance with the essential principles of honesty, integrity, independence, fairness, and competence. Often those appointed to serve on pension fund boards are not practicing financial professionals and may not be well-versed in best practices in the field. Establishing a benchmark code of ethics for those individual members of the governing bodies of pension plans provides them with a framework to guide their activities, and will give beneficiaries and participants an added sense of confidence that the trustees are working for their best interests.

What is the Pension Trustee Code?

Bob Johnson: The Code of Conduct for Members of a Pension Scheme Governing Body (“the Code”)—a collaborative effort by the CFA Institute Centre for Financial Market Integrity and a working group of global pension experts—provides a code of professional conduct for individuals who sit on the governing bodies of pension funds. The ethical responsibilities outlined in the Code are universally applicable regardless of the type of fund or where it is formed. The Code also provides guidance to assist individuals in complying with these principles when fulfilling their responsibilities on the pension fund governing board.

Mark Anson, CFA, President and Executive Director of Nuveen Investments, commented, “There are many things for an individual member of a pension governing board to consider in undertaking such a role, but acting to the highest ethical standards should be foremost in their minds. The Code is a valuable reference tool, applicable regardless of jurisdiction and type of scheme, which can be used to address ethical responsibilities and best serve the interests of participants and beneficiaries.”

Russell Read, CFA, former Chief Investment Officer for the California Public Employees’ Retirement System (CalPERS), heartily agrees: “This is excellent work that provides critical and much-needed guidance to pension plan trustees and investment advisors alike. During this time when pensions are receiving such intense public scrutiny, it is especially important to ensure that the best principals and practices are embodied by those with fiduciary responsibility.”

Who is the Code written for?

Bob Johnson: This Code addresses the professional conduct for individual members of the pension plan’s governing body in answer to the question, “How should individuals that sit on the governing body of a pension scheme conduct themselves?” In drafting the Code, the working group has specifically directed the list of ethical principles to individual members rather than to the responsibilities of the governing body as a whole, in order to reach those members of the board who have neither extensive experience in the investment industry nor familiarity with the primary ethical concepts related to asset management. However, the discussion in the guidance for each principle often does elaborate on best practices for pension plans in the context of an individual board member’s responsibility as a part of the whole.

What are the principles covered by the Code?

Bob Johnson: The ten principles addressed in the Code direct pension trustees to:

  1. Act in good faith and in the best interest of the scheme participants and beneficiaries.
  2. Act with prudence and reasonable care.
  3. Act with skill, competence, and diligence.
  4. Maintain independence and objectivity by, among other actions, avoiding conflicts of interest, refraining from self-dealing, and refusing any gift that could reasonably be expected to affect their loyalty.
  5. Abide by all applicable laws, rules, and regulations, including the terms of the scheme documents.
  6. Deal fairly, objectively, and impartially with all participants and beneficiaries.
  7. Take actions that are consistent with the established mission of the scheme and the policies that support that mission.
  8. Review on a regular basis the efficiency and effectiveness of the scheme’s success in meeting its goals, including assessing the performance and actions of scheme service providers, such as investment managers, consultants, and actuaries.
  9. Maintain confidentiality of scheme, participant, and beneficiary information.
  10. Communicate with participants, beneficiaries, and supervisory authorities in a timely, accurate, and transparent manner.

Does the Code offer specific advice to trustees about how to fulfill their responsibilities to the pension plan?

Bob Johnson: The Code has been kept deliberately high-level and principles-based, so as to address the primary ethical practices that a member of the governing body should follow when serving the fund, rather than prescribing the specific duties or detailed functions that a trustee should accomplish. While important considerations, those functional responsibilities are addressed in the detailed “Guidance” section of the Code rather than being imbedded into the Code itself. The guidance for and in support of each principle more fully explains how members of a pension scheme governing body should apply the principles in fulfilling their responsibilities. Depending on the nature and type of pension plan, members of the governing body may have responsibility for overseeing the administration of benefits as well as the plan’s investment decision-making process. Both the principles and guidance outlined in this Code apply equally to the officials’ duties in each of these roles.

Is the Code directed to pension plans in a particular market or region or to specific types of plans?

Bob Johnson: The Code is globally applicable and the principles outlined provide best practice regardless of where the pension scheme is formed or managed. The working group who participated in the creation of the Code strived to accommodate—in a single global standard for ethical conduct—the various pension schemes and sets of standards that the members of governing bodies are likely to face. The goal is to incorporate the Code into existing internal procedures while remaining focused on high ethical standards.

Certainly, codes of conduct addressing professional activities are standard practice for many successful investment firms, and have become increasingly common among public and private pension schemes as well. Just as there is no one-size-fits-all governance structure for investment firms, there is no single governance structure that can be universally applied to pension schemes. Varying goals, restrictions, political environments, market conditions, manager/trustee competencies, regulatory schemes, and many other factors will affect the appropriate governance structure for any pension scheme.

How was the Code developed?

Bob Johnson: Drafting the Code in partnership with a working group of representatives from pension organizations around the world provided a diverse perspective in developing the standards. The working group, led by the CFA Institute Centre for Financial Market Integrity, included representatives of the Council of Institutional Investors (U.S.), the Organisation for Economic Co-operation and Development (OECD), the National Association of Pension Funds (U.K.), the Swiss Association of Pension Funds, the Hong Kong Retirement Schemes Association, and the Dutch Association of Industry-wide Pension Funds. These organizations all provided invaluable insight in developing the standards set out in the CFA Institute Centre Code.

In July, 2007, the CFA Institute Centre introduced the working group’s draft code at a meeting of the OECD Working Party on Private Pensions and gathered input from meeting participants. In order to further strengthen the global application of the Code, the CFA Institute Centre also solicited public comments from all major global financial markets and from the broad spectrum of stakeholders impacted by the governance of pension funds. Many individuals and groups, including the Pension Investment Association of Canada, submitted comments and the working group incorporated these comments when producing the final version of the Code. [Comments received are available on our website at www.cfainstitute.org/centre/codes/pension.]

Are pension plan trustees required to comply with the Code?

Bob Johnson: Although adoption of the Code is voluntary, pension plans that adopt the Code for their governing bodies will establish an ethical framework for governing board members. As such, the CFA Institute Centre encourages pension plans to adopt the Code to demonstrate their commitment to better serving their constituents.

As noted by Juan Yermo, Principal Administrator, Private Pensions Unit, Directorate for Financial and Enterprise Affairs Organisation for Economic Co-operation and Development (OECD), and a member of the working group that produced the Code, “Around the world, pension funds are undergoing a major drive to modernize their governance structures and methods. This code of conduct, which complements the OECD guidelines on pension fund governance, provides a much needed global template for the industry, raising the bar of competence and integrity in pension fund boards and hence ultimately strengthening pension protection.”

If the Code is voluntary, won’t regulation of trustees conduct be more effective in guiding their conduct?

Bob Johnson: The CFA Institute Centre believes that effective self-regulation – based on voluntary adherence to high standards of ethical conduct that go beyond the minimum requirements of the law – is the most effective and efficient form of market regulation. Investors are best protected when market participants voluntarily adhere to high ethical standards based on their own “enlightened self interest.” The CFA Institute Centre encourages public companies, governmental agencies, unions, and others administering pension plans to implement the behavioral standards outlined in the Code. We also encourage plan participants and beneficiaries to ask their pension scheme managers to incorporate the Code into their internal procedures.

"This is an important step in setting out and clarifying individual trustees’ responsibilities,” remarked Jonathan Watkin, a working group contributor, pension consultant, and former Director and current Executive Committee Member of the Hong Kong Retirement Schemes Association. “It is also a valuable supplement to existing pension trustee and governance systems around the world.”

Please visit the CFA Institute web site for further details and to download a complimentary copy of the Code: www.cfainstitute.org/centre

About Bob Johnson

Robert R. Johnson, Ph.D., CFA, is Deputy CEO and Managing Director in the Education Division at CFA Institute and a member of the EDHEC Risk and Asset Management Research Centre's International Advisory Board. He earned his doctorate from the University of Nebraska-Lincoln in 1988, his MBA from Creighton University in 1982 and his BSBA from the University of Nebraska-Omaha in 1980. Dr. Johnson has over 50 publications in finance and economics journals, and has published in the Journal of Financial Economics, Journal of Finance, Financial Analysts Journal, and Journal of Portfolio Management, among others. He has been quoted in the Wall Street Journal, Forbes, and the Financial Times, among others. He has appeared on ABC World News, CNN, CNBC, and Bloomberg TV, among others. He serves as the Executive Director of the Research Foundation of CFA Institute, and on the advisory boards of the Journal of Portfolio Management and the Journal of Wealth Management. Bob Johnson will be participating as a panel speaker at the EDHEC Alternative Investment Days in London on December 9 and 10 next.


1 US$25 Trillion represents Global Institutional Pension Fund Assets in the 11 major markets, according to the Global Pension Asset Study 2008, by Watson Wyatt, January 2008.