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Trustees Responsible For Managing Expenses 

By: Bryan Kogut

With the second largest pool of capital in Canada, trustees of pension plans have a considerable amount of influence on the country’s economy. However, even if surrounded by a team of management experts, they must take care that they exercise their full fiduciary responsibility, says Bryan Kogut of BDO Dunwoody.

When the spotlight is shining on you, you have to ensure that your best side is showing.

Given several recent trends – market turmoil, corporate governance scandals, and the growing size of the market holdings of pension plans – trustees of pension funds are facing intense public scrutiny.

According to the Shareholders Association for Research and Education, in a November 2000 news release, “Trusteed pension plans represent the second largest pool of capital in Canada. As such, pension investment decisions shape our economy and our society.” Thus trustees now bear important financial responsibilities.

Since management responsibilities are shared with a team of experts – typically including an administrator, investment managers, actuaries, lawyers, and auditors – it’s sometimes easy for trustees to become complacent about their fiduciary responsibilities.

But this can be a serious mistake. Despite the fact that board members of multi-employer pension plans have been appointed by an employer or by a union, they have the same fiduciary responsibilities to the members of the pension plan as members of corporate boards have to shareholders. Yet, in recent years, a number of multi-employer plans managed by a joint board of employer-appointed and union-appointed trustees, have experienced highly publicized problems – many of them related to the issue of what are considered to be unreasonable expenses.

These incidents demonstrate the vulnerability of this area of trustee responsibility. In fact, in its summer 2000 Update, the Office of the Superintendent of Financial Institutions pointed out a variety of problems related to expenses based on on-sitevisits and mandatory filings. Extravagant charges for training trips and inappropriate expenses, including charging pension plans for hockey tickets and art, were among those mentioned.

Volatile Issue

Expenses are always a volatile issue. For many plan beneficiaries, they are a symbol of the trust in which they hold those representing them on the board.

Now, however, the pendulum is beginning to swing the other way, likely because of challenging market conditions – along with headline- making expense scandals. Plan beneficiaries are thus becoming more discerning regarding the administration of their plans and trustees cannot afford to disregard these concerns. By putting into place a proper program of due diligence related to monitoring expenses, you can avoid seeing your pension plan in the headlines. And you can also ensure that overall management of expenses stands up well to scrutiny by financial watchdogs and plan beneficiaries.

The fundamental components of an effective expense-monitoring program include a careful review, asking the right questions, and documenting responses.

Good governance related to financial management means ensuring that resources are properly managed and that waste is minimized. To carry out this mandate, it’s helpful for trustees to think of themselves as business owners. Whereas the owner of a business would pose questions such as “I can see that the company’s income is acceptable this year and feel we did well, how did we do compared to others?” and “Are there any areas where we could have done better?”, in the case of trustees, the questions would be: “We can see that we have a clean audit report – the system worked as it should – but how do our expenses compare to other funds? Have we managed properly?”

Review Each Area

The next step would be to review each area of discretionary spending to determine what is in line and what areas require closer inspection. Following are the common categories of expenditures that merit a careful look:

The most controversial items tend to be those relating directly to trustee expenses, such as meeting costs, travel, expense reimbursement, and daily allowances. Unfortunately, there is often not a clear measurement of what constitutes a ‘reasonable amount’ for these expenses.

Reasonable expenses for education, for example, are often challenging to quantify. Many educational programs are offered only in major centres in this country; therefore, the cost to a Newfoundland provincial plan would obviously be significantly higher than to an Ontario plan because of the travel requirements.

Audit costs can also differ widely. For pension plans, they vary according to the types of investments, the number of investment managers, or the amount and nature of real estate investments. For benefit plans, they vary according to whether or not the plan self-insures benefits. One common query among trustees is: “what is a reasonable daily expense or per diem reimbursement to trustees?”

One would normally turn to the Income Tax Act for some guidance as the act deals with such amounts in the case of automobile travel reimbursements and allowable automobile costs. Unfortunately, the act offers no help for this expense category because an allowance is non-taxable where it is “reasonable in the circumstance” and circumstances, as just mentioned, can vary.

To be on the safe side, if trustees are unsure as to whether an amount would be considered reasonable, seek assurance from experienced and trusted external resources: your auditors, actuaries, or, if your plan is not self-administered, by third party administrators.

Consult With Advisors

In fact, it’s a wise idea to consult with your advisors regarding what is reasonable for your plan under each expense category. This enables you to establish benchmarks against which you can compare current expenses – as well as future expenses. In this way, you implement a system of controls – if expenses fall out of line with what is considered to be a reasonable range, the red flag goes up. Then you can look more closely at the reasons for the discrepancy. One of the basic principles of good governance of pension plans includes controls for expenses.

If you have any concerns that certain expenditures may be out of line, your most important role is to ask the question: “Is this a reasonable amount?” Then seek assurance from appropriate sources.

Be sure that both the question and the response are documented in board minutes. While you might not receive a specific dollar value guideline in response to a question, you will benefit from expert guidance on an important issue. The essential aspect of good governance is that you have posed these questions of your advisors and that you secure appropriate responses.

Finally, make a point of reviewing expenses on a regular basis – at least annually.

Just like a conscientious business owner, trustees of multi-employer pension plan boards must be accountable for performance – and that includes thoughtful due diligence regarding the management of expenses.

Bryan Kogut is the managing partner of the Oakville office of BDO Dunwoody LLP.

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