Navigating Governance Risk

Transcription

1 Navigating Governance Risk How to Proactively Avoid Fiduciary Potholes & Limit Legal Liabilities September 25 th, 2018 Acme, Michigan

2 Session Presenters Brad Kelly Peter Landers Partner Partner (416) (416)

3 Are You Prepared if this Happened? SOURCE: 3

4 Liability Pressures are Increasing Based on 2017 fiscal returns, Moody s estimated Adjusted Net Pension Liabilities for 50 States: Cumulative Total Reached $1.6 Trillion (147% of Total State Revenue) Liability Leaders Include: Illinois ~ 601% of state revenue ($250.1B) Considering borrowing $107B in bonds Chicago considering borrowing $10B in bonds Connecticut ~ 360% of state revenue ($71.2B) Kentucky ~ 332% of state revenue ($48B) 4

5 Sources are Becoming Questionable 5

6 Decisions Carry Significant Impacts Michigan funds kept annual liability growth at 4% or less per year. 6

7 But Michigan Funds Are Not Out of the Woods Michigan Department of Treasury 110 local funds are underfunded Underfunded - <60% of what is needed to cover pension promise Collective ~$6.4B shortfall Michigan Senate Unfunded liability of state funds is ~$36B 7

8 Poor Governance Oversight Costs A Lot! (2007) The State Of Global Pension Fund Governance Poor Governance can cost pensions 1 to 2% annually Governance improvements should be a priority 1. Financial oversight 2. Board composition and skills 3. Board evaluations 4. Clarity in board and management roles 5. High-performance cultures with competitive compensation Ambachtsheer, Capelle, and Lum The State Of Global Pension Fund Governance Today 8

9 What Happens? 9

10 Possible Outcomes That Will Impact Funds Outside Appointees PROS Bring additional skills and knowledge Can provide unbiased views CONS Do not have skin in the game Can provide biased views Member Trustees Have skin in the game Understand member issues & concerns May not be professional / have strong oversight skills Member trustees have the ability to learn! 10

11 Primary Fiduciary Duties of Pension Trustees Basic Fiduciary Duties Loyalty Prudence Impartiality Ancillary Fiduciary Duties Delegation Co-Trustees Furnish Information to Beneficiaries Keep Records and Provide Reports Segregate and Identify Trust Property 11

12 Are Your Charters/Bylaws/ Policies Up to Date? When did you last review them? Have you EVER reviewed them? Are they relevant? Are they thorough? Policies & Processes protect you. Do you have policies and/or set processes in place? Did you follow the policy and/or set process? Have policies & processes evolved to meet your Board s needs? 12

13 Does Your Board? Provide direction and strategy to management Make policy that management carries out Select, evaluate and support the top executive (ED, Administrator, CEO, CIO) Approve high-level organizational goals, policies and practices Set and approve Board governance Set and approve Board delegations Oversee management, organizational and investment performance, risk and policy compliance Act as external advocate in public policy and stakeholder/community relations 13

14 Are You Aware of the Liabilities That Exist? Is Your Board a Target for Lawsuits? Non-Compliance With Governance Documents Unreasonably High Administrative Fees Negligent Selection and Monitoring of Service Providers Excessive Investment Management Fees Imprudent Investments Too Many Investment Options Self-Dealing Insufficient Funding 14

15 Are You Overseeing & Mitigating Risk? Operational Risk Administrative errors IT errors and failures Fraud Natural disasters Legal Outsourcing-related Governance Managerial Investment Risk Governance Market Liquidity Interest rate Credit Funding Outside Risk Reputation Cyber-security Social media 15

16 Do You Have an Investment Philosophy & Policy? Is There an Established Foundation? Policy Objectives Determination Role of Strategic Investment Classes Modeling of Strategic Classes Asset-Liability Analysis Policy Development Strategic Planning Portfolio Structuring Implementation Manager Selection Monitoring Do you Follow Them? 16

17 Are You Compensating For Performance? Do you use Performance Plans that: Aid recruitment and retention of talent Are clear on expectations and process Promote buy-in Based on influence Assess attainability Are simple Rely on strong communication Are renewable Are affordable Are pay increases related to performance? 17

18 Do You Have a Succession Plan Process? Articulate Business Strategy Define Experience & Leadership Competencies Required to Implement Business Strategy Assess Potential Candidates Development Planning Monitor, Measure and Evolve Emergency plans are a minimum requirement: Nature of emergency may affect candidates chosen Criteria for Interim ED/Administrator may be different 18

19 Are You Questioning Traditional Practices? How can you reduce your pension deficits? Increase Contributions Decrease Benefits Improve Governance Increase Investment Returns Decrease Operating Costs X X 19

20 Simply Stated Grow Savings Invest Find Savings 20

21 Easy Start to Strengthening Your Governance Have you ever assessed your governance? Governance effectiveness assessments are necessary And not painful Revisit/determine required board skills and expertise: Finance Investment Risk management Human capital management Contract review and negotiation Have you adopted technology to aid in improving your governance? Strategically evolve and improve your board capabilities 21

22 What We Know THE IMPACT OF GOOD GOVERNANCE LEADS TO EFFECTIVE FUND OVERSIGHT AND AN INCREASED ABILITY TO FIND AND LEVERAGE COST SAVING OPPORTUNITIES LOYALTY TO MEMBERS DICTATES THAT TRUSTEES & BOARDS NEED TO CONSISTENTLY SEEK WAYS TO IMPROVE 22

23 Words To Govern By Our time is our time It s up to us to make the most of it, make it amount to more than the sum of our days. Senator John McCain, 2018 When pension trustees step off of boards: Have we left it better off (in some way) than when we first joined? 23

24 Upcoming Webinar for Pension Community Thursday, September 27, :00-3:00pm EST If interested, feel free to register at: 24

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