Pension plan governance: a review of several models

 introduction

For far too long, pension funds and plans were assumed to be an area intrinsically attached to our employers – so it was rarely questioned that pension plan administration, and the decisions plan managers make on fund investment, was left to the employer. This is at least partly attributable to the myth that pension funds belong to our employers until we receive them – upon retirement. But, as CUPE has long argued, pensions are more properly understood as workers’ deferred wages – right from the moment that they are paid. This fact has led more and more workers and their unions to argue that the administration of these funds, and the plan mechanisms required for their use, should be controlled by the owners of these funds – the plan members.

This awareness became even more acute when it was realized that all too often pension fund investment – our money – was flowing into private enterprises which did not reflect the political values and principles of the labour movement, the most obvious example being the firms that operated in and profited from the apartheid regime in South Africa. Other examples of “unethical” investment can include the financing of anti-union and anti-worker companies, some of which may be active supporters of right-wing governments and policies. But CUPE, along with other unions in Canada, is working hard to ensure not only that such regressive investments are not made with our money, but that socially useful – yet profitable investments are made instead. The joint control of our funds is essential if these goals are to be achieved.

For all of these reasons, CUPE has long had a concern with the specific ways that our public sector pension plans are administered – in particular, the way that they are structured, and how their governing bodies are constituted. Recently, we have begun to make some significant progress in gaining a meaningful degree of control over several of the plans which we are members of. Of course, there is still a long way to go before we can regard most of our public sector plans as truly “jointly-controlled”. The following pages outline several different models of the administrative structures that underline the operation of different public sector plans. In some of the following profiles, our problems with various aspects of the structures are briefly noted.

Model #1: Hospital of Ontario Pension Plan (HOOPP)

There is one plan with an administrative structure that approaches our ideal model - that is, the Hospitals of Ontario Pension Plan, or HOOPP. The HOOPP plan is a 50/50 union-employer board, and has a rotating Chair and Co-Chair. Each organization selects its trustee and each trustee serves at the pleasure of the appointing body. In this model, the Board Chair participates in every role. We have found that it is essential that a dispute-settling mechanism be established as part of this model. Such a mechanism requires that an additional trustee be appointed only for determination of the issue in dispute.

 Accountability

Through our experience with HOOPP, we have found that one of the most important aspects of CUPE’s participation in the administration of the plan is a set of prescribed mechanisms which ensure meaningful accountability to and consultation with the plan members. For example, CUPE members recently voted to ratify changes to the plan that CUPE trustees felt were necessary. Not all trustees have these types of accountability mechanisms built into their system, but they are critical components of a democratically-accountable pension plan. This is particularly the case in a plan, such as HOOPP, where trustees have the power to lead, direct and change the actual policy and content of the plan. Where ideally such questions are subject to the collective bargaining process, one alternative for a plan where bargaining structures do not permit this possibility, is to systematically pursue a consultation process with beneficiaries and plan members that ensures they are informed and aware of what is happening, and can voice their opinion where input is needed.

Model #2: The Ontario Public Service Employees Union

One interesting example of a recently-negotiated plan structure with a single large employer is the OPSEU Trust Fund, which was worked out in April of 1994. Under the terms of their agreement, a new separate pension fund was created out of the previously-existing OPS pension fund specifically for the members of OPSEU (and certain other bargaining units). The fact that there was a form of joint control over the new $4 billion fund meant this agreement represented a significant step in the right direction in the battle for more control.

For example, while the previous Public Service Plan had been administered by a pension board appointed directly by the government, the new OPSEU Pension Plan would be co-sponsored by the government and OPSEU, and managed by a Board of Trustees composed of 50% OPSEU and 50% government appointees. However, under this model, when the trustees advise the sponsors that a change should be made to either the Plan or the Fund, the sponsors are expected to “work together in good faith to achieve a resolution with respect to any such required change”. This provision is important, as it means that real control over changes to the plan remains in the hands of the sponsors. It also means that the provisions of the Plan, the Trust Agreement and other plan documents are subject to the collective bargaining process.

The Board of Trustees is composed of 10 trustees, five of whom are appointed by OPSEU, and five of whom are appointed by the provincial government. The trustees are charged with appointing, from among themselves, a Chair and a Vice-Chair, and they are responsible for chairing the Administration Committee and the Investment Committee respectively. In the case of a deadlock, any five trustees may require the naming of an 11th trustee, who casts the deciding vote at the next scheduled meeting. If the sponsors cannot agree on an 11th trustee, he or she is to be appointed by the Chief Justice of Ontario.

Finally, a particularly significant component of the agreements establishing the OPSEU Pension Plan was the government’s acceptance of its responsibility for the existing $2.7 billion in unfunded liability ($571 million of which was the OPSEU share). This liability was scheduled for financing over 40 years. The 50% share of fund liability accepted by OPSEU only applied after the new fund began operation, and none of the existing liability was accepted by the union.

Model #3 : The B.C. Municipal Pension Plan

The B.C. Municipal Plan, which encompasses a broad range of CUPE employers, is overseen by a “Pension Board”, which is composed of nine members:

• four persons named by the Municipal Employees Pension Committee;
• three persons named by the government;
• one person named by the British Columbia Municipalities; and
• the Superannuation Commissioner, who will be Board Chair.

The role of the Board includes reviewing the existing legislative framework around pensions, and making recommendations to the government on the allocation of plan rules among statutes, regulations and policies. The Board also makes recommendations to the government (through the Treasury Board) on areas such as changes to benefits, contribution rates and funding policy. This system has a unique method of resolving issues where Board members remain in conflict: where the Board is deadlocked, a report is made with the Treasury Board which notes the various positions.

The Board is expected to ensure that:

• plan rules are consistently applied;
• there is an appeals process whereby plan member and pensioner concerns can be fairly and equitably resolved;
• as required, the Superannuation Commission can be directed as to appropriate application of plan rules;
• service levels are recommended at an appropriate level;
• budgets and staffing levels are recommended through review of the Superannuation Commission annual budget proposals;
• regular reports from the plan are reviewed;
• an annual report is submitted on the operation of the plan, the fund, and the Board;
• reports can be prepared for plan members and pensioners;

Clearly, the real power in this administrative model remains with the provincial government. However, because a serious governing body has been established, with a mind to representing the various interests in the operation of the plan, there is less likelihood that a government would succeed in completely ignoring the advice and guidance of the Board. Nonetheless, on any decisive question, the government retains the power to do so, and for this reason the model falls quite short of CUPE’s ideal.

Model #4: The Workers’ Compensation Board of Ontario Superannuation Fund

This fund is a defined benefit pension plan established under the Workers’ Compensation Act. Plan membership is mandatory for full-time Workers’ Compensation Board (WCB) employees. The WCB is responsible for ensuring that the plan is properly funded to meet the accrued employee pension entitlement. The WCB, as the employer, is the “plan sponsor” and appoints a plan manager who is responsible for the day-to-day administration of the plan. As such, this plan is very much an internally-administered plan, which is directed primarily by the Employer. A Superannuation Plan Executive Committee (SPEC) with membership from both management and employee members advises the Board on policy matters. A Member Advisory Committee representing the various member constituents and management reports to the SPEC and provides them with a “member liaison”. The Superannuation Fund is maintained separately by the WCB and is invested by the Board’s Vice-President of Investments, a professional investment manager, who is also responsible for the investment of the Accident Fund Assets under the Workers’ Compensation Act.

As with the B.C. Municipal Plan example, the WCB Superannuation Fund has limited scope for meaningful worker or beneficiary input. While the Member Advisory Committee and the employee representative on the Superannuation Plan Executive Committee may offer a minor vehicle for carrying the concerns of members to the plan administrators, these are not the ultimate decision-making bodies, and therefore can be ignored.

Model #5: The Connecticut Model

Another variation on plan governance is known as the “Connecticut Model”, from the Connecticut State Employees Retirement Plan. The responsibilities for the general administration and operation of the Plan are vested in a Board of Trustees called the Connecticut State Employees Retirement Commission. It has equal numbers of trustees from employees and employers. Employee trustees are appointed by the Bargaining Agents in accordance with the provisions established by those Bargaining Agents. The trustees representing the employees serve a three-year term and cannot be members of the same bargaining unit. There are also equal numbers of management trustees, appointed by the state Governor, who also serve three-year terms. There are two actuaries who are also trustees - one appointed by the unions and one by management. This way, each party has its own actuary paid for by the Fund at the Board level.

This system calls for a neutral trustee to be Chair. The neutral trustee is a member of the National Academy of Arbitrators and is nominated by the employee and management trustees together. A neutral Chair acts as an arbitrator in issues of dispute. Only the Chair and the two actuarial trustees are paid for by the Fund. All other trustees serve without remuneration.

Model #6: Ontario Municipal Employees Retirement System (OMERS)

The Ontario Municipal Employees Retirement System (OMERS) was established in 1962 by the Ontario government as a multi-employer pension plan for employees of local governments in Ontario. Some 1,114 municipalities, local boards and school boards participate in the OMERS plan.

As established under provincial legislation, OMERS is managed by a Board appointed by the Ontario government. Under the OMERS regulations, there are 13 members on the Board. As all members are appointed, CUPE does not have the right to choose its members for the Board. The Board is composed as follows:

• 9 persons who are employees of any employer, four of whom are officers;
• 2 persons who are members of a council of a participating local Board of a municipality;
• 1 official from the provincial government;
• 1 retiree.

This means that 7 of the 13 seats could be characterized as employer representative seats, though some of the employer seats are filled by persons who are plan members. CUPE has only 2 seats on the OMERS Board or 40% of possible existing positions. Yet, according to OMERS, CUPE represents 70% of persons in the plan.

In 1992 OMERS claimed 60% of CUPE members belonged to the plan. There are a myriad of other unions representing relatively few members in the plan. The other significant members are the firefighters and police. Board appointments are now for three years and typically there is a maximum of two appointments.

We would argue that membership on the Board should reflect CUPE’s numbers, but at the same time provide representation for the smaller groups. There could be, for example, the following composition:

• 4 CUPE;
• 1 fire;
• 1 police;
• 1 rotating;
• 7 employers;
• 1 retiree voting or not voting.

OMERS in Legislation

Provincial legislation requires that if a municipality or board has a pension plan, it must be OMERS. There are also strict procedures for withdrawing from the plan. If OMERS is removed from legislation, there is exposure to the risk of losing membership in the plan. This risk could be avoided if some minimum statutory basis for OMERS was maintained. However, this solution presents the problem of maintaining some government control over the plan.

Changes in Benefits

There are several different models for making benefit changes. In Quebec, trustees are responsible for setting contributions, investment and administration of the plan, but benefit improvements are the result of a process of negotiation. In HOOPP, it is the trustees who decide benefit improvements. Right now it is the government who determines benefit improvements. This is very awkward for CUPE as this means CUPE must try to influence both OMERS and the government to obtain improvements.

There are some difficult decisions to make with respect to changing the OMERS plan. Here are some options:

• give the trustees the power to decide the benefits taking into account the performance of the fund availability of surplus;
• establish a system where there is a separate negotiation process to set benefit and contribution levels;
• establish a process where unions determine a set of supplements which are then costed by OMERS and each union is responsible for negotiation. OMERS trustees are empowered to make improvements to the basic plan based on consultation with the unions and employers and based on the experience with supplementals.

Joint Liability Without Joint Control

In 1990, the government gave OMERS plan members joint liability for the pension plan, without joint control. CUPE members are 50% liable for deficits in the plan but have no meaningful control over the plan. The government makes appointments to the Board based on the practice of receiving names from the union. CUPE represents 70% of OMERS participants but has only 2 seats of 13 on the Board, and CUPE was consulted on only one of the appointments.

CUPE makes submissions to the OMERS Board concerning changes to benefit levels, investment policy, and contributions. The government approves changes to OMERS benefits based on recommendations of the OMERS Board, recommendations that may have nothing at all to do with CUPE members’ interests or priorities. For example, CUPE has pointed out that the present contribution to benefit ratios discriminate against lower paid workers. This is an equity issue of importance to CUPE members. OMERS, to our knowledge, has never made this the subject of a recommended change. The government does not consult with CUPE when making changes to OMERS regulations. In short, CUPE members have no workable way to have control or influence over their pension plan and their deferred wages which make up the fund.

 Conclusion

While the differences between these plans can appear quite minor, their implications can dramatically affect the way that unions and plan beneficiaries can play a role in co-administering a pension plan and fund. Perhaps the most significant point of differentiation among the above plans is the source of real policy direction for a plan - is policy (such as benefit and contribution levels) set by trustees who are charged with arriving at “prudent” investments and benefit levels (as in the case of HOOPP) or are such questions subject to a collective bargaining process (such as that of the OPSEU plan)? Either way, perhaps the most critical point is to develop a structure which facilitates and engenders accountability, with meaningful input and control exercised by the workers whose money is being “trusteed” for their retirement.

KS/LA opeiu 491