Pensions - Articles - Retirement Governance Framework Strengthens Risk Management

 Viewpoints Q&A: Retirement Plan Governance Framework Strengthens Risk Management and Compliance

 As multinationals expand around the world and more companies become players in the global economy, managing retirement and other benefit plans is becoming riskier and more challenging. In each country where a company operates, local laws, regulations, customs and tax systems complicate plan governance. A strong governance framework can help employers effectively manage risks and compliance — and thereby support the workforce planning that will enable them to compete in the global arena. In this article, two senior Towers Watson consultants discuss the ins and outs of such a framework and provide guidance for multinationals.

 What do you see as the greatest challenges for U.S.-based multinationals in retirement plan governance, risk management and compliance?

 Qureshi: The major challenges fall into seven areas of risk: financial, compliance, talent, fiduciary, accounting, operational and reputation. However, my experience has been that organizations focus mostly on three primary risk areas: financial, accounting and compliance.

 With financial and accounting risks, a company is concerned about the cash-flow, expense and balance sheet impact on plans and programs around the world, as well as wasting corporate assets if reward dollars are not optimally deployed. Legal or compliance risk is associated with either failure to follow the terms of the programs or failure to meet legal requirements at a local, regional or global level.

 The challenge for multinationals is to manage these risks with limited resources amid increasing global complexity.

 Levinson: There are several additional risks around compliance. These include regulatory risk, employment risk, and risks involving local laws and taxes.

 All these risks are much more apparent and acute in today's global economy. Because organizations have operations all over the world, they must be prepared to handle multiple, complex sets of laws, cultures, customs and regulatory schemes. A well-developed governance framework will help them consistently identify and prioritize their plans and risks globally.

 Once a multinational has acknowledged these risks, how does the company transition to problem-solving mode? And what are the essential elements of a strong governance framework to help combat risks?

 Levinson: In this case, the governance framework is a set of processes and controls for managing and overseeing the organization's benefit programs globally. We've seen that organizations have well-established processes for managing their global operations, finances and taxes. Their global benefit programs should be approached the same way, with a clear set of objectives, oversight and processes integrated at the local and global level.

 So you need to have a commitment to the value of global governance — to putting in place a framework that provides a level of consistency and flexibility for managing operations both globally and locally.

 The framework itself can be a very simple oversight structure applied on a global level, regional level and in each country. It's focused on three core areas: (1) identified roles and responsibilities — who's responsible for what (internal people, external service providers and advisors) at a regional and local level; (2) reporting protocols — the process for communicating relevant information from the global to the regional to the local level, and then back up the chain; and (3) documentation — the processes for documenting the necessary information: plan documents, contracts, compliance reports and financial reconciliations.

 Each of the core areas is applied to each of the functional elements of plan operations, such as investments, plan design, tax qualification, compliance, plan administration, communications, staffing and training, and insurance and bonding. These are the building blocks of a global governance framework.

 Qureshi: You could say that putting in place an overarching framework is about defining the people, process and technology aspects of global benefit decision making. Regarding the approval process specifically, I've seen a marked variation in how companies define "significant" decisions that require approval by a higher authority. Some companies establish a hard-dollar threshold for when a decision must be elevated to a higher level (such as a global benefit committee). Other companies provide their local people with a fair amount of autonomy to define what they believe to be a significant decision. The latter approach tends to work well in organizations with a trusting culture, strong inherent controls and good oversight as to what's going on around the world.

 As for the technology aspect, I'd like to add to Gregg's point concerning documentation. The need for a central database, preferably web-based, to manage information is critical. It not only institutionalizes knowledge within an organization, but also allows the organization to connect with the locals in a virtual space, combat distance and multiple time zones, use technology efficiently, and track information and approvals.

 Linked to that, more organizations are looking to put in place an attestation process. This enables corporate headquarters to require the locals to attest to certain activities — for instance, that all of their plans and programs are in compliance with local laws and regulations or that their plans and programs align with the company's overarching strategy or philosophy. The attestation process is being built into the technology used to oversee and manage benefit plans across the globe. It's a recognition that organizations don't have unlimited resources and can't audit all activities locally, but can require local people to attest that decisions are being made appropriately.

 It's generally assumed that all large multinational companies are committed to global governance. But if you were to draw a trend line for the last, say, 15 years, would it show a recent uptick in commitment?

 Qureshi: Global governance has been around as long as companies have been operating in a global way. But a watershed moment for U.S.-based, publicly traded multinationals was the passage of the Sarbanes-Oxley Act of 2002, which puts a spotlight on all material risks, wherever they exist.

 At that time, some of our large multinational clients did not know where they had material retirement plans. They needed to go through a process of gathering data on those plans and programs to be able to assess that risk. For many, their knee-jerk reaction was to centralize a lot of governance.

 Since then, however, the pendulum has swung back a bit to the regional and local operations. As the BRIC countries — Brazil, Russia, India and China — continue to experience significant growth, they're increasing their autonomy and requiring more say in the decision-making process. To some extent, this is a natural and understandable reaction to be able to respond nimbly to market demands.

 So corporate headquarters has relinquished some control, or at least the control is more nuanced. Multinationals are recognizing the need for local autonomy but balancing it with larger corporate standards and governance.

 Levinson: Think of it this way: Most of us who work in the United States grew up with this culture, understanding its laws and language. In our world, we know how benefits and getting paid work. But suppose you put a U.S. manager in charge of a benefit program in Brazil. Not knowing Portuguese or how Brazilians approach these issues, that individual is expected to understand local Brazilian compliance and to ensure the local program functions properly. Think of all the various tasks necessary to successfully manage a U.S. benefit plan, and then add a foreign language, culture, regulatory environment, benefits and tax system on top of it. This really speaks to the need for a governance program: a systematic approach that addresses the crucial functional issues of any benefit plan and paves the way for you to partner with people on the ground who understand the nuances of local laws and culture and can manage these programs.

 Qureshi: By opening up channels of communication with local operations — building trust between the local headquarters and local entities — companies find it easier to deploy strategy within that market. Also, having a set of principles that define a global benefit strategy allows you to achieve a number of outcomes, from selecting providers you can use globally, thereby capitalizing on economies of scale, to more successfully implementing a defined contribution approach to retirement plan design.

 Let's say I'm a multinational employer, I have an overall framework, and I'm committed to governance. Describe a blueprint my company could use to scale its governance framework for optimum performance in each of its locations.

 Levinson: I think a well-designed governance framework is scalable globally and for each location in which an organization operates. It's a simple model that can be applied anywhere. You identify roles and responsibilities, establish reporting protocols and maintain relevant documents. It's the application in each country that's unique because of the different benefit schemes, laws and regulations, investments, compliance, customs, and culture.

 Unlike in the U.S., a global oversight committee won't be a local fiduciary. Because of local laws and the vast amount of responsibilities, the committee's role will necessarily be corporate oversight. However, it's important to note that the U.S. fiduciary regime provides a good model for global governance.

 ERISA identifies the roles and processes critical to successful plan oversight. There are identified roles and responsibilities — including named fiduciaries, and investment and administrative committees — and others, such as investment managers, whose responsibilities are so integral to the purpose of the plans that they're fiduciaries because of their role. There are clear lines of authority, required processes for delegating that authority, standards for ongoing service provider selection and monitoring, and processes for addressing conflicts. All of these things are designed to ensure the appropriate level and quality of attention is paid to the benefit plans.

 Qureshi: There are a number of things you can do to manage your company's benefit plans around the world and to scale your governance structure to govern all these plans and programs.

 Prioritization is the first step. Risk exists in all markets. The key is to determine where the preponderance of that risk is. By assessing risk in each of your markets, collecting data, analyzing plans and understanding the overall benefit landscape, you can prioritize where you spend your time and where you focus your efforts.

 Second, organizations need to leverage their external providers — from brokers, to consultants, to insurance networks — to be extensions of their governance structure. These partners can provide information and alert corporate headquarters to potential areas of risk.

 Third, companies with limited resources need to recognize they can't go into every single country and assess all seven areas of risk effectively. They need to trust the locals and place accountability on them to manage those risks effectively through, for example, a well-executed attestation process.

 This all sounds like a sizable exercise and balancing act for multinationals. What would you say to a company that has operations in many countries and views this as a gargantuan task? What are the benefits of implementing these risk mitigation practices?

 Qureshi: I've seen HR departments blaze trails within their organization as to how they are structured and how they make decisions globally. HR governance can then be used as a template for other areas of the business.

 For companies that opt to act in a truly global way and make decisions, deploy capital and think about their business as one enterprise, effective governance is essential. It permits you to move talent more easily around the world, leverage providers across the organization, understand risk in every market, and take an enterprise-wide approach to managing and mitigating that risk.

 Levinson: Effective governance is about mitigating risk, but it's also about providing benefits in accordance with corporate objectives in an organized, structured way while dealing with various complexities. A global governance framework allows the organization to effectively oversee its benefit program on the global and local level, organizing and prioritizing many disparate areas of responsibility into a clear and manageable set of tasks.

 When it comes to retirement plan governance and the inevitable changes on the horizon, what should multinationals be paying attention to now — and how can they make sure they and their governance plan are ready for the future?

 Qureshi: The benefit environment is changing rapidly. With their aging populations, Western Europe and other mature markets are finding the costs of their socialized benefit systems unsustainable. As the cost burden shifts toward employees and employers, benefit practices and regulations in these markets are undergoing significant change.

 Meanwhile, in developing markets, new laws are being put in place as employees become increasingly concerned about retirement. In China, you see the framework for retirement plan savings. Russia is showing stronger interest in retirement plans. And Brazil has always had a very buoyant retirement environment. As more and more legislation is passed in these emerging markets, companies will require good governance to stay on top of developments.

 Levinson: A well-crafted and maintained global governance framework is the lens through which the organization can oversee and manage its benefit plans globally and locally. The framework brings clarity and focus to a very complex and ever-changing set of circumstances, highlighting routine functions, issues needing attention, resource requirements, and ways to evaluate and measure benefit program success.

 Qureshi: As events in the benefit environment unfold, organizations will confront a plethora of information about these changes from consulting firms, insurance companies and law firms focused on specific regulatory changes. So in addition to good governance, you need a strong consulting partner to help sift through the information overload, determine what is relevant to your organization and offer advice on what you need to do about it.

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