Skip to content

Effective Governance and Pension Management

Financial Services Commission Pensions Seminar – February 16, 2012
Professor Trevor Munroe

May I first of all warmly congratulate the Financial Services Commission for hosting this seminar under the theme: Bridging Gaps through Promoting and Understanding Pension Management. The purpose of the Seminar as I understand it is to educate and empower trustees as plan fiduciaries, as critical stakeholders in the entire pension system. I would go so far as to say that without the education of you, the trustees, the system cannot achieve its objectives.

Of course, this is not only true of trustees in relation to the pension system; it is also true of critical stakeholders in relation to other systems – in relation, for example to our environmental management system, in relation to our transportation system, in relation to our political system, to pick three current examples at random. And so, I would urge that those regulators and the authorities take a leaf out of FSC book and follow the example you are setting today with this seminar.

As such, with the smoke still lingering in our nostrils and polluting our atmosphere, I urge the National Environmental Protection Agency to follow your example, convene a meeting of stakeholders, including vested interests involved in landfill operations, and broadcast the results to the public the way you are doing. Similarly, I urge the Office of the Political Ombudsman, the regulator of electoral and political conduct to call together key stakeholders, councilors and candidates in the local government election, due less than six weeks away, to educate them and the public that the buying and selling of votes is an offence and a breach of the law. Equally, the Transport Authority should bring together stakeholders, in particular, the owners and drivers of taxis and minibuses to raise the level of their awareness of their responsibilities and to signal more effective enforcement against irresponsible and illegal road practices, practices which risk life and limb every day up and down the length and breadth of Jamaica.

Indeed, awareness building is an indispensable, but of course an insufficient, condition of effective governance and this is what you have asked me to speak today_Effective Governance and Pension Management. And by effective governance we mean, very simply, “effective steering” since the term “governance” comes from the Greek word meaning “steer”. So, effective governance, means the awareness, the process, the institutions and the rules relating to steering; whether steering a regulatory body like the FSC, an educational institution, a business, a political party, a citizens association, a community, an entire nation or in our case a pension system.

In this regard, experience is teaching and it is now increasingly, indeed universally accepted that progress cannot be made nor even past achievement sustained whether in the household, in the economy, in culture or society without effective governance. In fact, a fundamental cause of the financial and continuing global economic crisis since 2008 was ineffective governance, particularly of the biggest banks and financial institutions on Wall Street, ineffective governance in managing insatiable greed and unacceptable risk-taking, particularly with other people’s money, amongst the 1% in the United States and elsewhere around the world. As President Obama put it in his Budget Message on Monday, February 13 _ in the United Staes ” Those at the very top grew wealthier while everyone else struggled with paychecks that did not keep up with the rising cost of everything from college tuition to groceries…..Then, in the middle of 2008, the house of cards collapsed… And” Obama continued, ” the regulators who were supposed to prevent the crisis either looked the other way or did not have the authority to act. In the end this….irresponsibility helped trigger the worst economic crisis since the Great Depression…..millions of hardworking Americans lost their jobs, their homes and their basic economic security”. Regrettably for millions around the world as well this is an excellent example of ineffective governance_regulators ( and trustees) cannot ‘look the other way’!!

Look at your television tonight and see the image of burning buildings and citizens clashing with police in the streets of Athens ironically, the cradle of modern democracy. And as you see those burning buildings, consider that one of the major reasons for Greece’s fiscal debacle is ineffective governance of its taxation system. KPMG International in the November 2011 “Issues Monitor” estimates that “Greek workers and companies have evaded taxes amounting to more than EUR 31 Billion (US$42 Billion) which equals more than 10% of its GDP.” And before we furrow our brows and wonder what’s wrong with Greece, contemplate that the World Bank in it’s May 2011 study: ” Jamaica Country Economic Memorandum_Unlocking Growth”_ estimates that in Jamaica, ineffective governance of our tax system ” has reduced tax revenue by an estimated 20%, significantly reducing the Government’s spending capacity” at a time when there is the most dire need for resources to be deployed in our clinics and hospitals, in our schools and infirmaries.

Lest you forget, it was ineffective governance which contributed to the near collapse of our banking and financial systems in the mid-1990s, ballooning our debt from 75% of GDP in the early 90s to laying the basis for the well over 130% where it is today. And so we could go on and itemize the extent to which ineffective governance facilitates criminal elements attaching themselves to political parties and continues today in Jamaica to allow secrecy in election campaign contributions, so you and I remain in the dark as to who is paying the piper and therefore best positioned to call the tune whichever government is in office. Just as we were in the dark until recently that self-confessed money-launderer , David Smith, had donated significant sums to both political parties_one far more than the other but both nevertheless_ for the 2007 Jamaican general elections. And then we wonder why he was arrested in Turks and Caicos, in South Florida_ almost everywhere else but in Jamaica, the very jurisdiction in which most of his victims suffered from his criminal actions!!!

This leads us to identify the enemies of effective governance – SECRECY, LACK OF INFORMATION, ABSENCE OF ACCOUNTABILITY. Conversely foundation principles of effective governance – OPENNESS, TRANSPARENCY AND ACCOUNTABILITY.

These are principles which have been seriously lacking and remain deficient in so many aspects of national life. Pension Management prior to the 2005 Pensions Act was no exception to this deficit of effective governance. Prior to 2005, there was no enforced or enforceable mechanism for employees to know what was going on in pension schemes to which they contributed. There was no legal requirement for employees to be represented on boards of trustees. Trustees representing and chosen exclusively by the sponsoring companies could seek to change the rules to benefit the employer.

Sometimes as in the Desnoes and Geddes case in 2003, the Court would support them and rule against the employee claimants. In a famous ruling in 2006 relating to events prior to the coming into being of the Pensions Act 2005, the Jamaican Supreme Court ruled that the trustees of the Pension Plan at Desnoes and Geddes were within the law in amending Section 15 of the Rules to provide that “Any residual surplus [in the fund after employees had received their allocation] shall be allocated to the employer.” In the earlier, more celebrated or notorious case, depending on your perspective, of Air Jamaica, recall what happened.

Air Jamaica was privatized by the Government in 1994, all the employees with four exceptions were made redundant on 30 June 1994. By 1994 a substantial actuarial surplus of approximately $400 Million had been built up in the pension fund after the defined benefits had been paid out in accordance with the pension plan. Section 13 of the plan provided that in the event of discontinuance, the balance of the fund should be applied for the benefit of members and their dependents. On 10 August 1994, the workers sought a court order to ensure the distribution of the surplus in accordance with Section 13. Nine days later, on the 19th August 1994, Air Jamaica purported to make amendments to the Trust Deed of the Pension Plan in order to enable the surplus to be paid to the company. The Air Jamaica Acquisition Group appealed this matter right up to the Privy Council After the Jamaica Court of Appeal by way of a majority decision, supported the workers claim, the Air Jamaica management was not satisfied and took the matter all the way to the UK Privy Council. I quote from the Privy Council judgment delivered by Lord Millett in April 1999: “Their Lordships are satisfied that the 1994 amendments are incurably bad.” I repeat, “incurably bad” and the Privy Council went on to rule that the surplus be allocated to the employees and to their estates. Their lordships also concluded on the need for further legislation to strengthen the governance of Jamaica’s Pension system.

That need was met in part by the Pensions Act of 2005 after much public discussion and deliberation in the Parliament_I recall well the long meetings of the Select Parliamentary Committee on which I served. Under this Act, you as trustees, with the oversight of the Financial Services Commission, established in August 2001, now have a most critical role to play in pension management by virtue of that Act.

Let us recall 10 important dimensions of effective governance brought about by the Act and it’s Regulations:

  • No more can a Trustee Board be made up only of persons nominated by the sponsors or the employer alone or exclusively. The Board “….shall include at least one member nominated trustee….elected by the active members of the fund, moreover the Board must include, where the scheme comprises 30 or more deferred pensioners, at least one pensioner trustee”
  • But effective governance requires not just that the members and pensioners be represented but they must know what they are doing, especially at a time of great volatility and much complexity in the options available for investment of the fund. This is not a joke business “Worldwide the value of pension funds in 2008 amounted to US$22 Trillion down from US$27 Trillion the previous year”. In a most insightful article published in the Journal Pensions Volume 15 No. 1, 2010, Professor Gordon Clarke of Oxford University attributes this in part to “the apparent inability of many pension funds to adequately respond to the credit crisis and global recession (due to) significant failures of governance.” Hence Regulation 10 under our Act dealing with the duties of sponsors in our Act must be taken absolutely seriously. It states that sponsors “shall….allow the trustees reasonable time off during working hours, with pay….for training relevant to the performance of such duties.” Of course, the time off needs to have regard for the sponsors business. It is imperative in the interest of effective governance that you trustees insist of sponsors living up to this obligation. Professor Clarke urged, in the current climate that trustees “who are chosen to represent stakeholders interest ought to meet high levels of qualifications for appointment.” Otherwise how will the trustee be able to exercise effective oversight over investment managers, administrators and other stake-holders ? You have to get training and you have to take it seriously!!
  • Deviant behavior too common in relation to either delay or non-transmission of statutory deductions by employers to tax authorities is not to be countenanced in relation to members’ contributions to the fund. Regulation 10 G requires, and you must insist, that contributions of the members shall be remitted to the investment managers within one week of the end of the month in which deductions were made
  • Effective governance also requires complete openness and absolute transparency. Hence trustees shall prepare and distribute free of charge to each active member of the scheme within 4 months at the end of each plan year, a benefit statement and to each new member, full information on the scheme. None of this shall be in ‘mumbo jumbo’ either. Regulation 12(1) states “information disclosed to participants, beneficiaries and their representatives shall be clear, accurate, complete and timely and where the use of technical jargon is unavoidable it shall be accompanied by an explanation in simple language.”
  • Effective governance requires, and the law demands, no more “around the corner” or “behind closed doors” amendments of Trust Deed or Plan Rules. Any intention to amend requires that members be notified in writing of that intention, then amendments be submitted to the members for approval “at least 45 days before the date on which they intend to submit the amendments to the Commission of its approval.” And in the case of amendments which results in a change in the fundamental nature or design of the scheme, at least 50% plus one of the members must approve. The Financial Services Commission thereafter has the final word in endorsing or refusing to approve the amendments
  • Effective governance requires that no more shall sponsors be able to wind up schemes and apply the surplus as they would wish. After the winding up, the trustees, let me remind you, including representatives of the employees and pensioners representatives shall forward to the Commission “the scheme of distribution of the surplus for the Commission’s approval.”
  • Trustees are to be accountable. They are to prepare an annual report of the fund of the scheme and submit it to the Commission “and on request of each participant.” I believe that this should not be on request, but obligatory (Regulation 14)
  • Trustees need to ensure that administrators and investment managers “provide regular, timely, clear, fair, complete and accurate information in reports to the trustees and their agents.” (Regulation 9(D))
  • Effective governance requires that you, the trustees be aware of and ensure that along with the Financial Services Commission that the offences and penalties specified in Part 6 of the Act be scrupulously enforced. For example Section 53 states “a sponsor who fails to pay over to his investment manager contributions deducted from the salaries and wages of members, within 14 days of the end of the month in which the deduction was made commits an offense and is liable on summary conviction before a Resident Magistrate to a fine not exceeding $3 Million.”
  • The law also includes a blanket provision: “A person who contravenes any provision of this Act for which no penalty is provided is liable on summary conviction before a Resident Magistrate to a fine not exceeding $3 Million or to imprisonment for a term not exceeding two years.”

These are but some of the requirements for effective governance and pension management. They repose special authority and special responsibilities on you, the trustees of private pension schemes which fall under the Pensions Act.

May I add one concern and recommendation, which I made during my time in the Senate; that is, that the public pensions system be brought in the purview of similar pensions governance arrangements. It cannot be right nor be effective governance that the National Insurance Fund, which has net assets available for benefits in the Fund of 60 Billion Dollars, be under less rigorous governance arrangements than the private schemes regulated by the Financial Services Commission.

Vision 2030, Jamaica’s National Development Plan outlines strategies for effective social protection. Strategies to “promote greater participation in and viability of social insurance and pension schemes” to ‘significantly expand coverage of occupational pension schemes’. The fulfillment of these strategies is critical to our future as a people and confidence in the governance arrangements of pension schemes is fundamental to achieving this national goal.. In building that confidence you understanding your role as trustees, investment managers and stakeholders, you living up to your responsibility at all levels in pension management is fundamental to the integrity of the process and to enhancing social protection in our country at a time of critical need.

May I give you every encouragement to live up to do your duty without fear or favour_not to look ‘ the other way ‘ either as a Regulator _ the FSC_ nor as Trustee and may I express every confidence that you will discharge your obligations to the best of your ability in ensuring effective governance in Pension Management.