Culture of compliance prevents mismanagement, conflict at Canadian pension funds: expert

Read: Canada’s retirement system ranks No. 12 out of 47 countries but has room for improvement: report

Canada’s pension policy landscape has come into focus as a large pension plan in the U.S. faces allegations of improper management and internal disputes. The State Teachers Retirement System of Ohio, which is worth US$94 billion and serves about 500,000 active, inactive and retired Ohio public educators, has seen leadership infighting, two board resignations and serious allegations raised against poor handling of funds and even public corruption, according to a report by ABC News 5 Cleveland.

The dispute originates from a debate around the use of actively managed funds versus an index fund strategy. According to an Associated Press report in May, Ohio Attorney General Dave Yost launched a formal investigation into what he called the fund’s “susceptibility to a hostile takeover by private interests” and pursued the removal of two board members who backed a plan to hand over $65 million of the plan’s assets to a private investment firm.

In May, pension consultancy Aon stepped down from providing services to the plan and, earlier this month, McLagan, a data and analytics subsidiary of Aon, also ended its services.

Read: 74% of U.S. DC pension plan sponsors to conduct plan fee review in 2024: survey

The Ohio case is a clear example of a complete breakdown in both the governance of the board and the plan itself, says McEvoy, adding it would be difficult to envision a similar case taking place in Canada due to the strong compliance in the country around investment decision-making. Indeed, he points out Canadian pension funds must abide by quantitative and qualitative investment limits that are incorporated into most pension legislation in the country.

“My initial reaction [to the Ohio pension fund case] was, ‘Wow, this is crazy.’ There seems to be so many missteps along the way.”

By contrast, he says Canadians should be proud of the country’s pension plan leadership, which is creating a system with steady follow-through steps on all matters of policy and investments with plenty of space for additional perspective. “I think there’s less room for things to fall out of place.”

Indeed, a global pension transparency benchmark released earlier this year found five Canadian pension funds were among the most transparent in the world across cost, governance, performance and responsible investing disclosures.

Read: Five Canadian pension funds receive top scores for transparency: benchmark

While smaller plans may not have the same resources as their larger peers to oversee internal policies or manage their investment needs, McEvoy notes an environment of collaboration is helping those smaller organizations to match the high standards of the Canadian regulatory framework. “It’s a good lesson to pay attention to policies and procedures and good governance and making sure . . . [the plan has] highly capable people, which there’s an abundance of in Canada.”

The Canadian pension industry is backed by detailed regulations and a proud sense around the fiduciary duty of plan administration, as well as a strong backbone provided by evolving policies. “There’s so much good material written by our regulators and influenced by participants to manage risks.”

Leah Fichter, chair of the Canadian Association of Pension Supervisory Authorities, said part of the association’s 2023 strategic plan for the next three years includes continuing to emphasize both risk- and principles-based rules.

“As regulators, the current environment has reinforced the need to assist pension plan administrators in meeting their fiduciary duty while protecting the entitlements of pension plan beneficiaries.”

Read: FSRA outlines risk model to avoid pension plan investment turmoil, risks